This is a guest post from Kickfurther, where companies fund between $20,000 to $1,000,000 of inventory in as little as an hour. Use Kickfurther to access volume-ordering discounts and make no payments until sales begin. Email email@example.com to learn about accessing working capital needed to grow your business and produce inventory that meets demand.
Inventory financing typically looks like a line of credit that is tied to inventory. It allows companies to produce inventory above what cash-on-hand would allow and prevents growth-killing scenarios from halting the momentum of a growing company. With inventory financing, companies use the acquired funding to increase available stock and pay back later once the funded inventory begins selling.
In this article, we’ll cover everything you need to know about inventory financing, including how to use it and different options.
Common Uses of Inventory Financing
Inventory financing is primarily used by these four types of businesses, though it can be used by any product-based company:
- Omni-channel brands
- Distributors and wholesalers
- Businesses with high seasonal demand
These businesses commonly leverage inventory funding to help support strategic growth. The funds are used to improve order turnaround and delivery, expand into additional regions or markets, support seasonal demand, or simply eliminate the cash flow pinch caused by the lead time between ordering inventory and when it lands.
Leveraging Inventory Financing to Prevent Stock Outs
While being out of stock is a great sign you’ve developed a product consumers love, that silver lining doesn’t soften the blow of knowing you’ve missed out on available sales and revenue because there wasn’t enough inventory to meet customer demand.
Similarly, when you receive a purchase order from a large chain store — the golden ticket you’ve been working so hard toward — but don’t have the fund on hand to produce and manufacture the goods, inventory financing enables you to take advantage of that opportunity to scale.
How Inventory Financing Helps Businesses
Inventory financing is a strategic resource for businesses of all sizes. Designed specifically for businesses that need to overcome uneven demand curves or long lead times, this resource helps growth-oriented companies to expand while preserving cash on hand. This tool has become an increasingly important resource to support growth.
Here are five ways inventory financing help small businesses grow and resolve funding issues:
1) Inventory financing helps companies prepare for busy sales seasons
June cash flow can look insufficient to fund inventory you’ll need for holiday sales, but that’s around the time you’ll begin placing those holiday inventory orders. Without inventory financing, businesses like these would be unable to adequately prepare to meet holiday demand.
Using this tool properly, businesses of all sizes can fund the production of goods and pay those dollars back as future inventory sells.
This is especially important for businesses with highly seasonal sales or who experience a significant holiday surge as it allows you to maximize high-potential sales seasons even when payment for production falls during a slower cash period for the business.
2) Inventory financing makes it easier to invest in growth areas without sacrificing production runs
It takes more than just products on a shelf to make a business run. There are set expenses, but there are also equipment upgrades, marketing expenses, and other costs that rise as your business scales.
As you grow your business, you likely targeted a shortlist of growth initiatives you believe will carry you to the next level. The projects you’re targeting likely range from expanding product lines to hiring additional help, or perhaps increasing marketing efforts or onboarding a fulfillment partner that can help you keep up with demand.
Don’t choose between investing in growth activities and producing inventory. Using inventory funding unlocks cash usually tied to inventory purchases to invest in the areas you need for growth.
3) Inventory financing overcomes limited loans and lines of credit
Unfortunately, younger and smaller businesses often do not qualify for traditional lending that meets the full funding needs for inventory runs large enough to fully seize growth opportunities.
Inventory funding allows companies in these categories to pay for production runs and use the inventory produced as collateral to back the funding. As the items sell, you issue payment back to the funders, equipping you with the capital to produce inventory with payment terms that match natural sales cycles.
4) Inventory financing injects working capital into your business
Working capital is always a good thing for eCommerce businesses, especially when used strategically. With tools like Kickfurther, you can use inventory as collateral for working capital that allows you to reinvest where your business needs. This could be hiring, research and development, or anything else you need to build the foundations of a successful eCommerce empire.
5) Merchants don’t have to wait on invoiced payments to arrive in order to grow
Inventory funding permits the purchase of inventory on an as-needed basis, allowing you to take advantage of opportunities that quickly materialize and can’t be delayed until invoiced payments arrive to bolster your financial position.
The flexibility to seize opportunities creates the nimbleness needed to maximize sales of a hot product or fulfil a surprise purchase order. Scaling companies agree seizing opportunities is imperative for increasing sales.
Inventory Financing Options
Inventory financing allows businesses to draw needed funds to capitalize on growth opportunities and typically falls into one of two categories: WIP and PO financing. With Kickfurther, you can also get reimbursed for recently funded inventory.
1) WIP Financing
Work-in-process (WIP) financing is a type of inventory financing where the lender often pays the contractors or suppliers directly for the manufacturing of your goods.
2) PO financing
With purchase order (PO) financing, you provide a purchase order to the lender, ideally from a retailer with a solid credit rating, and the lender finances the fulfillment of that specific order.
Picking the Right Inventory Financing Option
Financing inventory is smart for companies with a large cost center associated with manufacturing or inventory. As always, picking the correct financing option and partner for your business is key. To determine which option is best for your needs, consider the following:
- When is the cash needed? Is it necessary to have on hand to start production, at the point of shipment, or at some point thereafter?
- Are you using the cash to pay for inventory, free up working capital, support marketing, or another purpose?
- How and when would you like to repay the money?
- How much money do you need?
Answering these questions will help you to identify your funding goals so you can make a better decision around this important matter.
Inventory Financing Helps Small Businesses
As larger retailers push to extend payment terms from Net 30 to Net 60 or even Net 90, many small businesses miss growth opportunities because they are waiting on invoiced payments. While factoring is an option, it may be more costly depending on the business age and type of receivables.
In addition, for companies in growth mode, a direct line to increasing sales and revenue comes from producing enough inventory to meet market demand. Inventory funding enables companies to produce additional inventory without sacrificing needed investment in operations, marketing, or equipment.