Inventory Financing - Advance Loan for Inventory Purchase

Inventory Financing

Every business which indulges in trade, maintenance of stocks, or inventory is a basic necessity. At different times, they have to replenish their inventory, sometimes in bulk to reduce cost. The turn-around time for conversion of stocks and inventory to cash is variable, resulting in capitals getting locked in them. An inventory loan in such a situation helps to unlock capital ensuring cash flow and liquidity, keeping the stock asset intact. Inventory financing is based on the value of the stock in hand, which helps the business to look for expansion.

What is Inventory Financing and How Does it Work?

Inventory financing is a loan that businesses can take out by using their unsold inventory as collateral. The lender assesses the value of the inventory and offers a loan based on a percentage of its market value. Once the loan is repaid, the inventory is returned to the business for sale. However, if the borrower fails to repay the loan, the lender may sell the inventory to recover the loan amount.

In India, many lenders offer inventory in finance, with loan amounts typically reaching up to 90% of the inventory’s value. The specific terms value depends on the industry, type of goods, credit history, and financial health of the borrower. This financing method is popular among businesses needing liquidity without selling their stock immediately.

Why Companies Need Inventory Funding

Inventory financing is essential for businesses looking to maintain and expand their operations without disrupting their cash flow. It serves multiple purposes, which can significantly impact a company’s growth and ability to stay competitive. Here’s why inventory funding is a useful tool for businesses for the following reasons:

To Purchase More Inventory

One of the primary reasons businesses seek inventory financing is to maintain an adequate stock level. It is especially during periods of high demand or seasonal spikes. This allows companies to purchase more products than they might typically afford, helping them avoid stockouts and capitalise on growth opportunities. For instance, during festive seasons like Diwali or Christmas, retailers often need additional inventory to meet the surge in consumer demand. Inventory financing enables them to front-load their stock and meet this demand without waiting for internal cash flow.

To Allocate Capital Elsewhere

Managing a business often means juggling multiple expenses. Sometimes inventory purchases tie up valuable capital that could be used elsewhere. With inventory financing, companies can redirect funds to other key areas of their business, while still maintaining a healthy stock level. Here’s how:

Marketing and Promotions: During peak seasons, companies need to amplify their marketing efforts to drive sales. Inventory financing helps free up cash for advertising campaigns, promotional discounts, and other marketing activities that can boost revenue during these critical periods.

Product Diversifications: As consumer preferences evolve, businesses may need to expand their product offerings. Financing allows them to invest in new inventory without compromising cash reserves. This can include introducing new product lines or variations to meet changing customer demand, helping businesses stay competitive.
Research and Development: In a competitive market, staying ahead often requires innovation. Businesses can use freed-up capital for R&D. This can allow them to explore new ideas, improve existing products, or gain insights into consumer trends. This strategic investment helps them tailor their offerings more effectively to their target audience.
To Improve Cash Flow Flexibility

Small and medium-sized businesses often face cash flow challenges, particularly if their operations are tied to fluctuating sales cycles. Inventory financing provides the necessary liquidity to manage day-to-day operations without resorting to selling off assets or taking high-interest loans. It offers a lifeline during slower sales periods while preparing the business for future growth.

Seasonal and Growth-Related Stockpiling

Companies with seasonal sales cycles or those experiencing rapid growth often face a mismatch between cash inflow and the need for inventory. Inventory financing helps these businesses stockpile goods in advance of seasonal or promotional periods. It ensures they are well-positioned to meet the anticipated demand. Retailers, for example, can use financing to stock up before the holiday season or major shopping events like India’s Great Online Shopping Festival.

To Avoid Disruptions in the Supply Chain

Global supply chain disruptions have become more common. This makes it difficult for businesses to secure inventory at the right time. Financing helps companies pre-purchase goods when prices are stable. It shields them from price hikes or delays caused by supply chain issues. In industries like manufacturing or wholesale, this can be a game-changer in ensuring operations continue smoothly without delays.

Features of Inventory Financing

Asset Backed Loan: The inventory serves as collateral for the loan.

Loan Amount Based on Inventory Value: The loan amount depends on the percentage of the inventory’s market value, which varies by lender.

Secured Loan: It falls under secured business loans and can be structured as a revolving line of credit.

Flexible Conversion Time: With stock financing, it does not need to be sold immediately, offering flexibility for inventory turnover.

Short-Term Credit: These loans are typically short-term and are repaid when the inventory is sold.

Loan-to-Value Ratio: Lenders usually offer between 50% to 90% of the inventory’s value.

Improves Liquidity: Businesses can maintain their stock while improving cash flow.

Widely Used by SMEs: Inventory financing is especially favoured by small and medium-sized enterprises, retailers, and wholesalers.

Types of Inventory Financing in India:

The classification of loan against inventory is dependent on the nature of products handled by the business. Based on this criterion, there are two distinct types of loan against inventory in India:

Inventory Loan: It is a one-time loan offered to borrowers to cope with emergency cash requirements against the resale value of the inventory.
Inventory Line of Credit: It is an ongoing funding solution primarily catering to ensure capital infusion in cases of unforeseen business expenses. This is a form of pay later finance that helps the business to restore the balance in the credit account as and when possible.

Apply for Inventory Finance Online

Options for Inventory Financing

Debt Financing

Traditional banks and financial institutions like Lendingkart offer debt financing as a reliable option for inventory financing. These loans are usually secured, meaning businesses must use their inventory as collateral. In India, many banks and NFBCs offer competitive interest rates based on the company’s creditworthiness and the value of the inventory. Debt financing is preferred by companies that have a stable credit history and want to maintain full ownership of their business while accessing necessary funds for inventory purchases. However, high interest rates and strict repayment schedules can be challenging, especially for businesses with fluctuating revenue.

Crowdfunding

Crowdfunding platforms like GoFundMe are gaining traction in India as innovative ways to raise funds. This method allows businesses to pool small amounts of money from a large number of supporters, often in exchange for future products or services. Crowdfunding does not involve interest rates or collateral, making it an attractive option for startups and small businesses looking to expand their inventory without taking on debt. However, the success of crowdfunding depends heavily on a well-executed marketing campaign and the ability to engage potential supporters. It requires significant time and effort, and there’s no guarantee that enough funds will be raised.

Equity Financing

Equity financing involves selling shares of the company in exchange for capital. This is a common opinion for businesses looking to scale up, as it provides access to large sums of money without obligations to repay. Companies can use the capital to purchase inventory or invest in other business areas. In India, equity financing is typically pursued by larger businesses or those with high growth potential. While this method does not require repayment, it does not mean giving up a portion of the company’s ownership and involving shareholders in decision-making processes.

Revenue-Based Financing

Revenue-based financing is a flexible option that aligns well with businesses that generate steady revenue. With this approach, businesses borrow money and repay it based on a percentage of their revenue. This method is particularly useful for businesses that experience seasonal sales fluctuations. It provides the flexibility to manage repayments based on performance rather than fixed monthly instalments. In India, revenue-based financing is gaining popularity among eCommerce companies and retailers with variable income streams.

Supply Chain Financing

Supply chain financing is another viable option for inventory financing. It involves working with larger corporations or suppliers to obtain funding against unpaid invoices or purchase orders. This method allows businesses to access cash flow without having to sell equity or take on traditional debt. In India, supply chain financing is becoming increasingly popular as more companies aim to optimise their working capital. It helps businesses maintain a healthy cash flow while managing their inventory efficiency, especially in sectors like manufacturing and retail.

Requirements for a business loan against inventory:

Inventory in any business is an asset. Management of inventory is the primary factor that influences a lender to fulfill the credit needs of the borrower. The approval of your loan against inventory in India relies heavily on the quality of inventory handling for a realistic appraisal of your needs. Check out the ways by which you can facilitate inventory finance for small business from Banks, NBFCs and Online lenders like Lendingkart.

Inventory Management	An organized inventory speaks volumes about the efficiency of the enterprise. Accuracy of inventory details duly audited is a plus to help the financier validate claim integrity.
Protection from Elements	The shelf life of inventory in the business is important for finance. Enough measures adopted to protect inventory against natural elements for increasing its shelf life impresses the inventory financing companies.
Inventory Inspection	A business enterprise which is ready for surprise visits by the lender is one that follows best practices enhancing functional efficiency.
Sales Records Accuracy	Accurate sales record is important to ensure the repayment ability of the business. It is an indicator of well managed business.
Redundant Inventory	Redundant slow moving inventory that is not cashable reflects poorly on the management skills of the business. It makes business sense to avoid resource wastage.

Inventory financing advantages and disadvantages:

Before weighing the pros and cons of inventory loan, it is prudent to take a look at its redeeming features.

It unlocks blocked funds in inventory.
Enhance inventory as well as support liquidity.
Funding between 90% and 100% of the inventory value.

With such inherent benefits of seeking inventory finance for small business, it is also vital to look at all the pluses and minuses of such loans.

Pros:

Short term advance loan for inventory purchase is an ideal solution to grow your stock to help generate healthy sales. A mobile business cycle of stock and sales are complementary to each other and the health of the business.
The inventory loan does not entirely stipulate the nature of fund use. A business can gain substantially by using an additional capital to expand product lines and equip sales channels to increase business opportunities.
It offers avenues to small and medium businesses to seek finance which is otherwise ineligible for traditional loans.

Cons:

Being a short term credit, it may not meet the long term needs of the business. The repayment of an inventory loan is tied up with the life span of the inventory at hand.
It is suitable only to small businesses and is not particularly suited to the needs of large enterprises.

Eligibility Criteria:

Inventory loans are ideally suited for the following types of business enterprises and activities.

Travel agents.
Kirana store owners.
Distributors.
B2B buyers.

The various criteria set for the eligible businesses are:

The borrower must be at least 18 years in age.
He must be an Indian citizen.
The business must be operational for at least one year and in the same location.
The credit rating of the enterprise should be commendable.
The turn-around time is favorable for the business to earn a profit.
Some lenders also fix a minimum turnover amount to be eligible.
There should not be any credit default history with any lender.

Documents Required:

The list of documents is only general, and it is important to be guided by the specific requirements of the best inventory financing company on the business horizon.

Valid KYC documents of the promoter as well as the business including PAN card.
Bank statement for a specified duration.
Balance sheet and P&L Account Statement.
Personal ITRs.
Business Registration information.
Business appraisal report.
Copies of inventory invoices.
Collateral documents.

Application procedure for inventory Loan:

Most lenders allow online application process for inventory loans. To apply for inventory financing, businesses can approach banks, non-banking financial companies (NFBCs) or online lenders. At Lendingkart the steps typically involved are simpler than traditional loans:

Online application.
Submission of documents.
Loan appraisal and valuation of the stock.
Rate is offered, and the loan is sanctioned.
Disbursal of the loan.

Apply for Inventory Loan Online

Fees and Charges of Inventory Loan:

Rate of Interest	Starting from 1.25% per month
Tenure	Short term. For line of credit and shelf life of the stock.
Loan amount	Between 90% and 100% of the inventory value
CIBIL rating	If required, ideally around 700
Repayment	Bullet payments. In the case of Line of credit it is flexible.

Conclusion

Inventory financing offers a lifeline to businesses by providing the necessary funds to maintain adequate stock levels and meet customer demand. It is especially helpful during peak seasons. It helps companies avoid stockouts, improve cash flow flexibility, and invest in other critical areas like marketing and product development. With a variety of financing options available, businesses can choose the best method to align with their growth strategy and operational needs. Inventory financing not only supports immediate working capital requirements but also ensures long-term sustainability. It is especially beneficial for small and medium enterprises (SMEs) looking to scale without risking liquidity. By leveraging this financing, businesses can stay competitive and responsive to market fluctuations. Lendingkart simplifies the process for SMEs by offering collateral-free inventory financing. We ensure quick approvals and tailored repayment plans, ensuring businesses maintain both liquidity and growth.

Inventory Financing FAQs:

1. How does the rate of interest for an inventory loan differ from a traditional loan?

Normally, the rate is higher than traditional term loans.

2. Where can one seek inventory finance in India?

In India Banks, NBFCs and Digital NBFCs extend inventory loan.

3. What is the form of repayment of the loan??

It is flexible, and the business needs a bank account to service the loan.

4. How is the inventory finance amount processed?

On submission of all requisite documents along with the application to the lender, the inventory in hand is valued for arriving at the loan amount.

5. How is the loan terms fixed?

The loan tenure is determined by the type of loan, In the case of line of credit, submission of periodic stock value statement is needed for fixing of the borrowing limit.

6. What types of businesses commonly use inventory financing?

Startup inventory financing is commonly used by businesses across various industries, including retail, manufacturing, and e-commerce. This financing method helps secure funds for purchasing and managing inventory. Whether you’re a small business or a large enterprise, inventory financing, often in the form of inventory lines of credit or loans, is essential for optimizing cash flow and sustaining operations wherever possible.