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Businesses Considering an Inventory Loan
By The BIDaWIZ Team - December 21, 2009
It is not uncommon for seasonal and fast growing businesses to inquire about obtaining an inventory loan from a bank. An inventory loan can be a great financing tool for well established companies with short-term inventory shortages.
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What if I Operate a Startup Business?
Well, it depends on the nature of the business but if you are a startup, it will likely be difficult to obtain an inventory loan since you don't have extensive sales history.
Typically, lenders prefer to give an inventory loan to companies with consistent sales history to avoid the scenario of a company defaulting on its loan. Even though the loan is secured by the inventory, that inventory value may be difficult to assess given that it is a startup business. Banks are typically scared away by this scenario. Also, if you get stuck with unsold inventory that is secured by the bank, expect to pay a high interest rate, which is no fun.
When Might a Startup be Ready for a Inventory Loan?
After testing the product out on a small scale reassess if the inventory loan makes sense for the business--sometimes it is about taking baby steps.
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What Type of Companies Should Consider an Inventory Loan?
Generally, companies that are well-established and have an idea of what their inventory turnover rates will be in the future. For instance, successful seasonal ski equipment companies.
Basically, companies that have:
1. High Inventory Turnover Rates
2. To Keep High Inventory Levels to Meet Demand
3. Easily Sold Inventory
4. A Mature Product with Steady Sales History
5. A Clean Balance Sheet with Little Debt
Which Types of Companies Should NOT Consider an Inventory Loan?
Companies that are new to the business or have very hard to sell or move inventory (i.e. jewelery businesses & most startups). Businesses in which the future sales and inventory turnover rates are hard to predict.
So, companies that have:
1. Obsolete or Aging Inventory
2. Difficulty Selling Inventory
3. To Use the Loan as a Long Term Financing Tool
4. A Balance Sheet with a High Amount of Debt
5. A Brand New Product with Little to No Sales History
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More Corporate Finance Questions?
Your specific situation may not fall under the circumstances detailed above. If so, the Corporate Finance Advisors are Here to Assist.
Have Comments? Write to comments@BIDaWIZ.com
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