Why get your inventory financed?
Inventory management, operation and financing is a crucial issue for companies. The objective is to limit warehousing costs while ensuring a level of stock that is conducive to ensuring the delivery of products without being out of stock. Inventory financing solutions are therefore a central management and development tool for many start-ups. Let's take a closer look at how to finance your inventory.
Who should consider inventory financing?
The proper use of inventory is a lever for growth and competitiveness for many companies. All companies are likely to need to finance their inventory with banks in order to ensure the payment of their suppliers. This is particularly the case when the company's business grows, demand increases and opportunities emerge (such as new suppliers ready to invest or an influx of new customers).
Companies may not have the funds to pursue new projects or launch a new line to meet their new volume of demand. In the face of the potential capital gain, entrepreneurs therefore agree to take on debt to finance their inventory.
In practice, it is the physical or online stores that are regularly faced with this situation. Their store starts to grow and become successful, and the company may have difficulties to meet the demand of the consumers because of the lack of a sufficiently large and optimized stock.
A business that has taken out a business bank loan must also pay interest on that loan. Depending on the financing arrangements, the inventory has been pledged as collateral for the funds. Moreover, for all types of companies, the management and the exploitation of its stock capital represent a cost: to decrease or to optimize its modalities of storage represent very important levers of development.
Inventory financing is an optimal solution for a company whose business model enables it to sell very quickly and in the short term. Indeed, the faster the company manages to sell its stocks, the faster it will be able to repay its bank loan or to pay its supplier, and the more its financing will be profitable.
It is therefore a favorable feature for online stores that have significant expenses for their storage. It is favored by companies that invest a lot in their products and that can attest to the impact of this investment on their working capital needs. Conversely, inventory financing is not suitable for a business with a small warehouse and low-value products as well as a low working capital.
Inventory financing benefits for companies
Inventory financing is a very advantageous funding device for the small companies, which have needs of cash flow on a short term that exceed the amount of their available cash flow. It is thus very regularly used to ensure their BFR and to refund their suppliers. It is also a solution which allows to support the new projects of the company, its growth, its seasonal activity to bring in quickly available cash flow and to renew stock. Inventory financing can be needed for all sorts of products: goods, raw materials, finished products, etc.
In addition, the inventory financing agreement is a less expensive solution than a professional loan (which is subject to high interest rates) or factoring. Inventory financing frees up assets that are still in inventory: companies save space and avoid consuming resources to store stock that is not immediately useful.
The advantages of inventory financing also allow a company to respond very quickly to growing demand, to ensure peaks in activity or to launch a new project. It can thus truly ensure its development, launch the creation of a new product, ensure its storage and compensate for periods of important WCR (working capital requirement).
It is also a system that is very popular with companies that plan to import into France and export internationally. In this type of business model, it is not uncommon for products to be blocked at customs or for the transport of goods to be long and very expensive. In this context, inventory financing allows you to pay your suppliers and customers and minimize your late payments.
Administrative procedures of obtaining inventory financing
To benefit from this financial solution, it will be necessary to set up the inventory pledge device. The stock guarantee takes two forms: the pledge with dispossession and the pledge without dispossession. This solution can be applicable to all stocks, whatever their nature.
Having your inventory financed and pledged is a complex and time-consuming administrative process. In order to know the amount of your stock capital, you must have it audited by experts. Thus, the products pledged as collateral must be subject to regular checks and monitoring by a third party.
Moreover, the type of credit that follows the pledge of the stock is often limited in time and its term comes at the same time as the sale of the products and goods that concern it. While, in theory, all funds can be secured and financed, the condition for obtaining this type of loan is very often the value of the inventory rather than its nature.
Traditionally, an inventory financing project can be considered in three ways:
- Through a classic professional credit with a bank: an overdraft authorization, a campaign credit, factoring, cash credit, etc.
- By means of a financing warrant with or without dispossession. In this case, a promissory bill signed by the company pledges its goods to a third party. You should know that the warrant can be a derivative product associated with a support. This support can take the form of a share, a bond or raw materials.
- By opting for the inventory aging credit. Be careful, this financing mechanism generally concerns wine activities. It ensures the working capital for the time that the product ages. It therefore comes to an end after two or three years. In France, this solution is regulated by a national agreement that requires the involvement of three actors: the producers/merchants, the customs administration and the bank.
- By drawing up a contract giving the third party holder the right to buy or sell its assets. Different from factoring, in this case, the contract specifies the quantity, the price, the maturity date of the assets concerned as well as the amount of the receivables. The customer and their bank will be able to stipulate that these assets mentioned in the contract correspond to the company's inventory.
Inventory financing: the alternatives
Digital and Tech start-ups as well as many SMBs have reported difficulties in obtaining traditional loans for their inventory financing projects from banks. Some alternatives have emerged to fill this funding gap, such as club deals, fundraising or mutual funds.
Silvr is a neolender that offers financing solutions and business loans for inventory financing based on the revenue-based financing method, which is a real alternative for digitized SMBs. The evaluation of a financing application is based on a numerical analysis of the past 6 months of business metrics, estimating the potential monthly turnover of the applicant company.
Once a company is approved for a loan, it receives the funds within 48 hours. While interest rates can be moderately high, our inventory financing solutions offer great payment flexibility. Companies are free to choose the amount and frequency of their repayments: repay either on fixed basis or revenue-based. For example, in months when they have no sales, they do not have to make payments. However, they may make larger payments during periods of high sales, with no increase to the overall cost of the loan.
