How does inventory financing work?
Inventory loans work similarly to other kinds of business loans. The main difference is that they are used to purchase inventory. Because of this, they differ in several ways.
How are inventory loans different from other business loans?
Inventory loans are a bit different from typical business loans. They will not require you to come up with collateral, as your inventory is automatically used as collateral. This makes inventory loans a popular financing option for small to medium-sized retailers. Important to note that an unsecured business loan with no collateral can be used for any purpose, including purchasing inventory.
Because they are often meant for newer and growing businesses, inventory loans also don’t have the stringent requirements that other business loans do. But they still operate in the same way; you borrow money and then you pay it back as per your arrangement with the lender.
How to get an inventory financing in Canada?
First, the borrower applies for a loan from an inventory financing company. This process is usually very quick and entirely online. The terms on the loans you’re offered will depend on your personal credit score and your business’s financial information.
After the lender receives your application and assesses it, they will send you an offer. You can then choose to accept or reject the offer. If you want to accept it, you can submit a full application. Then the lender will send you your funds and your repayment process will begin.
Is an inventory loan right for your business?
If you have a solid business plan, then yes. Inventory loans make sense for your business if you’re sure you can sell your inventory. However, they are not equally useful for all businesses.
If your business has a fast sales cycle, then buying quick-turnaround inventory with an inventory financing makes sense. However, if your inventory has an unpredictable turnaround time, then you should be careful. You want to make sure you can successfully turn your inventory into cash and pay the lender back. Otherwise, you risk paying more in interest or even losing your inventory.
What to consider before applying for inventory financing?
When you’re shopping for an inventory loan, make sure to compare rates. The APR on an inventory financing offer is the most important figure to pay attention to. The higher it is, the stronger a drag it will be on your cash flow.
Inventory term loans come with periodic payments. Make sure you can afford to make these payments before you accept a loan. This is why you should compare inventory loan interest rates beforehand.
Also take the repayment process on an inventory loan into account. If the frequency of repayments is a problem, that will also affect your cash flow.
Key takeaways
- Inventory financing is easily accessible in Canada
- Inventory loans use purchased inventory as collateral. You can also use an unsecured (no collateral) term loan for your business and apply it towards purchasing inventory.
- Be sure to compare lenders and their rates
- Inventory loans are best for companies with fast inventory turnaround
