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Small Business Inventory Loan: Steps to Getting One for Your Business

Getting a Small Business Inventory Loan

Small Business Inventory Loan

Inventory is the word we use to describe anything from the raw material used to produce products and goods to the merchandise the business will use to sell to consumers or other companies.  Inventory is easily one of the most valuable assets owned by a business.  The turnover of stock is the primary source of cash flow and annual revenues.

Regardless of your business or industry, there is a good chance you need to maintain inventory. You can be a B2C (business to consumer) or a B2B (business to business) inventory is critical to your everyday success.

When you have what you need and when you need it, you ensure that your customer perceives your company as a valued resource.  Logically, if you properly manage your inventory, you can confidently grow your business.  Unforeseen changes in the marketplace sometimes derail your best efforts.   Lack of stock or inventory means a lack of sales.  You also risk losing customers who seek your product elsewhere.

What Types of Businesses Benefit from Inventory Loans?

  • Retail establishments
  • Manufacturers and Wholesalers
  • Restaurants

What is a Small Business Inventory Loan?

Companies that need to build up their inventory for upcoming sales often use a small business inventory loan. For example, a business may use this type of loan to stock up on inventory for a holiday or event where they know the excess inventory will be sold promptly, thus enabling them to pay off the loan quickly. Or a new business may use an inventory loan to build the initial inventory needed to run their business.

The inventory loan is usually a term loan or business line of credit.  These business loans enable you to purchase your inventory.  Often, the inventory purchased with the funds will serve as collateral if you cannot make payments promptly.

Understanding inventory management is the crucial first step to securing a small business inventory loan.  There are pros and cons to having too much or too little inventory on hand.  You can think of this as the Goldilocks Principle.  You don’t want too much or too little.  You want a balance that is just right. Generally, it is considered disadvantageous to having too much inventory.  The reasons are the increase in storage costs, the risk of spoilage, and the chance of your goods becoming obsolete.

On the flip side, if you do not have the inventory, you risk losing potential sales or, worse, losing market share.

Naturally, having the financial wherewithal to keep the proper amount of materials on hand is critical to maintaining your business. Frequently, you will require additional working capital during the slower months or to ramp up your inventory for a peak season. Inventory loans, which are commonly called inventory financing, are designed to provide small business owners the working capital and loan options to purchase additional inventory needed to succeed

Inventory loans are designed to keep enough money in the business bank account to take advantage of opportunities.  The cash on hand means you can make sure you have enough of your product when there is high demand. You also want to be in a position to take advantage of any bulk discounts that are available from your key suppliers to save money.

Most businesses have a pattern or seasonality to their sales.  The supply and demand are one’s busy or slow season.  Most retailers will tell you that the Christmas season is their most active while the beach resorts in New England will experience their sales peak in the summer.  The key is to apply for inventory financing before the anticipated peak.

What are the Funding Options?

Before we answer that question, there are several other considerations.  First, you must determine precisely how much inventory you need.  Remember the Goldilocks Principle.  Next, decide whether there is inventory you need, but can’t afford.  Third, how much money do you need to purchase the inventory?  Last, how much can you afford to repay while maintaining day-to-day operations?  Once you do that, you can look at the following inventory loans.

Working Capital Loan

This loan helps with the everyday operations of your business. This business loan offers longer terms with higher loan amounts and lower fixed payments.    The interest payments are tax-deductible, and this reduces your actual costs.

Unsecured Small Business Loans 

Most online lenders will offer an unsecured business loan.  These unsecured loans contrast with the traditional bank or credit union.  The main difference is the conventional lenders will collateralize the loans with the cash and assets of the business.  The lenders will also secure the loan with the owners’ personal assets, including homes and automobiles.  These are relatively short term loans that range in terms of 6 months to a year or more.  These loans are perfect for the business that needs the money quickly due to changes in the marketplace.  Loan amounts will range from $10,0000 to $500K.

Line of Credit (Think of this as an inventory line of credit) 

This type of loan is not dissimilar to the equity lines of credit you have with your home equity loans.  Your business credit lines are for a set dollar amount with a specified interest rate.  You can draw on that line as needed to pay for your materials.  Q, your credit score needs to be 680 or better.

Merchant Cash Advances

Cash advances are a prevalent method to finance inventory, especially with restaurants or businesses that are high volume retail.  The appeal to this type of financing is it offers quick funding.  The other advantage is that repayment reflects your daily sales.  That means that stronger sales will enable you to repay this advance more quickly while a slowdown will not require a fixed payment that may crush your cash flow.

Business Credit Cards

Securing a business credit card enables you to acquire the necessary inventory or supplies.  The advantage is that rates can start as low as 0%, and you only pay interest on the funds you use. An actual business credit card will build business credit and not impact your personal credit.  Business credit cards are sometimes easier to qualify than traditional business loans.

Steps to Qualify for a Small Business Inventory Loan

To qualify for a small business inventory loan, your business needs to operate using actual inventory. In other words, your business must provide a physical product, not a service.

Typically, the minimum qualifications for an online lender require you to be in business for at least a year.  Banks, on the other hand, will need at least two years in business.  The banks will also consider personal credit scores to determine risk.  The alternative lenders will consider the cash flow, and average bank balances more than personal credit or your credit score. All you need is a one-page online application.

Traditional lenders will review your financial history and inventory records to determine whether you are the right candidate for this type of loan. They will want to see detailed records of your past sales and profits.  The banks also want to know whether there have been incidents of damaged inventory. It is always wise to keep detailed records of all stock and financial transactions; in this case, doing so will significantly simplify your loan application process.

In some cases, lenders will also send an auditor to survey your inventory and company, which can prolong the approval process. If you need to acquire a small business inventory loan quickly, companies like Sunwise Capital could be a better option than a bank. Sunwise Capital works with small businesses to provide convenient and straightforward solutions and can usually supply funding in as little as 24 hours.

Is a Small Business Inventory Loan Right for Me?

As with any financial commitment, you’ll want to ensure you understand all the details of a small business inventory loan before deciding if it’s the right option.

A small business inventory loan can increase sales volume by allowing you to keep more products in stock at any time. For new or smaller businesses, in particular, this can be a tremendous advantage because you may otherwise be unprepared for a sudden surge in demand, or fast-paced growth. It also allows you to stock up on seasonal items for short-term product changes and prepare for busier months. Plus, you won’t have to put up any personal collateral to qualify for the loan.

The disadvantages to a small business inventory loan are that they can sometimes be more challenging to qualify for, take longer to complete and fund, and have higher interest rates than business lines of credit or other loans.

Contact Sunwise Capital

Sunwise Capital is proud to be a favorite among small business owners. We strive to do everything we can to help you understand all of your financing options, as well as how to qualify and how to choose the right choice for your business. We put our complete focus on providing small businesses with the tools they need to thrive.

We offer several financing options at Sunwise Capital, even if you have bad credit, including small business inventory loans, and we are happy to answer any questions you have about this type of loan and any others. We want you to be fully informed and ready to put your capital where you need it most. Contact us at 888.456.9223 to discuss your small business financing options today!

Mark Kane 2

Mark J. Kane, Founder & CEO of Sunwise Capital, is a distinguished entrepreneur with over 16 years in business financing. Beginning as a psychologist, he quickly became a trailblazing Hospital Administrator. Mark has built multiple ventures, notably accelerating a startup to $18M within months. His transition to Sunwise Capital stems from a deep-seated desire to empower business owners with strategic financial solutions. Recognized for his expertise, Mark's leadership at Sunwise Capital reflects his commitment to fostering business growth and success. Click the link to read more about the author.

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