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How inventory financing can help your business grow

Knowing about small business financing options and where to get them is really important when you have a business. You may encounter occasional cash flow problems due to slow-paying customers or when unexpected expenses arise. Or perhaps your business is seasonal, and you didn’t make enough money last year – or through COVID, to sustain smooth operations. The good thing is that several options are available for small businesses to gain access to fast funding. Traditional lending institutions, like banks, often have very strict funding criteria. Conversely, non-bank lenders, specialist lenders, fintechs and private lenders, like Mango Credit, are renowned for having more flexible lending criteria that support small businesses to funds (including short-term loans, which can be a handy alternative).

One such short-term loan is inventory financing. According to Investopedia, “Inventory financing is credit obtained by businesses to pay for products that aren’t intended for immediate sale. Financing is collateralised by the inventory it is used to purchase. Inventory financing is often used by smaller privately-owned businesses that don’t have access to other options.” Or in other words, inventory financing allows you to leverage your business inventory in exchange for cash. This is achieved by tapping into the value of your inventory that has not yet been sold. The upside of this approach is that you won’t typically be required to use any other assets as security to receive funding. Instead, your stock serves as collateral; if the business isn’t able to repay the financing, the lender can claim your inventory or stocks and use them as payment.

Inventory financing can be a lifeline to a small business that needs immediate funding. Here are six ways how inventory financing can help your business grow.

1.     It improves cash flow

Inventory financing unlocks your cash that’s tied up to your inventory. With this financing product, you don’t need to wait for invoice payments to arrive to receive working capital or funds. It secures additional working capital that supports growth spurts and seasonal sales fluctuations. 

Furthermore, if your business is seasonal, it’s quite possible prone to cash flow gaps – particularly during the slow season. Though, whether it’s a high or low season, there are still expenses, including monthly payables – as well as preparation costs to gear up for the peak season. Inventory financing helps improve the business cash flow by making more working capital available. Common uses for this additional cash injection include bulk buying (which is detailed below), as well as purchasing equipment to help create more efficiencies.

2.     It increases your buying capacity

With funding available from inventory financing, a business can quickly purchase any needed inventory. It gives you the resources needed to prepare for a busy season or buy necessary materials when a large order comes in and you don’t have inventory to fill it. You can easily stock up on inventory or replenish the supply. Accepting large or bulk orders may become easy which can also encourage your clients to continue working with you.

Inventory financing also helps you avoid product shortages and keep your most popular products well-stocked.

3.     It doesn’t require additional collateral

Inventory financing usually does not require other asset to be used to obtain the loan (the business inventory is enough to apply for it). Many business owners see this type of finance as less risky because it doesn’t require personal or business assets as security.

4.     It helps you prepare and take advantage of the seasonal increase in demand

Seasonal demands can be hard to manage during the slow season when there are not many sales. It’s crucial for many businesses to have access to funds to stock up on inventory for the busy months. For example, if your business sells swimwear, you may seek to stock up late winter to prepare for spring or summer. Having the capital from inventory financing helps you prepare for your busiest times and even save for the slower periods to sustain the business.

5.     It helps you seize good business opportunities

Inventory financing could be the solution that enables you to be able to pursue a great business opportunity. It’s common for business owners to use inventory financing to help fund these ‘too good to pass up’ or time-sensitive opportunities.

6.     It helps you invest in growth areas without sacrificing the production runs

You don’t have to choose between buying a piece of equipment to help keep up with demand and producing inventory. Inventory financing can be a great way to invest in growth areas without placing pressure on operational expenses. This may be an equipment upgrade or expanding a product line. Another common choice is to use the cash from inventory financing to improve the business marketing or update your inventory tracking methods.

Key takeaway

Inventory financing allows a business to secure funding using its inventory, and it can be a great alternative to obtain working capital if you have a lot of inventory in your warehouse. In addition, inventory financing can help grow the business by improving cash flow and providing resources to fund other business initiatives and opportunities. With more capital on hand, the inventory buying capacity of a business also increases.