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Things to watch out for when dealing with Inventory Financing

Published on 25th May 2018 - Last update on 4th July 2020

A key aspect of running a successful business is being able to offer your customers high-quality goods and services that they’ll come back for time and again. Yet, as demand grows and more customers turn to your business, keeping up with the demand can be tough. Although drawing funds from your working capital may seem like a wise move at the time, it’s a risky strategy that could lead to any number of issues in the long-run. That’s why many SMEs apply for Inventory Finance, or Stock Finance, when it comes to keeping their shelves full and their cash flow steady. A short-term solution that allows you to withdraw funds from a lender-controlled Revolving Credit Facility, what aspects do you need to appreciate before entering into such a commitment?

  • Lenders consider it a high-risk product
  • Provide regular inventory updates to lenders
  • Some SMEs may find the product restrictive

Is Inventory Finance a high-risk solution?

Some lenders may consider financing inventory a risky investment in your business, and for a number of reasons. Inventory can sometimes be difficult to acquire and it's worth is generally subject to customer interest. For example, if you were to use Inventory Finance to obtain large quantities of children's toys, the stock may possess a high retail value at the time. But come next season, another product may have been released to draw attention away from your stock. As such, the retail value of your stock decreases over time and you may be left with goods that you can’t sell. Another aspect that makes lenders consider Inventory Finance a high-risk solution is that goods can be damaged or stolen which immediately causes you to incur a loss, affecting your business’ ability to repay the agreement.

Is maintaining your inventory becoming a handful? Finding it difficult to cope with slow trading periods? Apply for Inventory Finance, or learn more about how your business could benefit.

Will I need to update lenders on my business’ inventory?

Unlike many other finance products, Inventory Finance requires you to stay in constant contact with your lender, providing them with regular up-to-date reports on your inventory. Some of the details you may need to submit each month could involve stock levels and the rate at which you’re turning goods into sales. The reason for this is that lenders want to know that you’re selling the stock concerned so they can make a healthy return on their investment.

Although lenders can repossess the concerned stock in the event of nonpayment, they’re still exposed to a high amount of risk. The stock may have lost it’s retail value over time or spoiled if the agreement concerns food, affecting their ability to regain the money that they’re owed. As such, some lenders may require you offer a Personal Guarantee on the loan.

What constraints are there with Inventory Finance?

Even though Inventory Finance can be a useful tool for acquiring more stock, refreshing your inventory or supporting cashflow, some business owners find the way it operates restrictive. With Inventory Finance, your business is granted access to a set allowance from a lender-controlled facility each month which is based on the equity within your inventory. For example, if your inventory is valued at £50,000 then the size of the allowance could be more or less in the same region, subject to negotiation. However, if you withdraw more than what the facility allows you’ll incur an overdraft penalty. Plus, whatever funds you withdraw need to be fully repaid within 30-90 days. Therefore, you must ensure that your business can achieve a quick turnaround of the concerned stock.

Still considering Inventory Finance for your business?

If your business provides goods and services, Inventory Finance could be a useful solution to explore. Offering you access to a lender-controlled facility, it grants you the ability to withdraw funds which can be eventually repaid and withdrawn again on a cycle. This means that you can use the product to acquire fresh stock and used to replenish your stockroom yet again as it’s sold on. Therefore, Inventory Finance can help ensure that your business always has a sufficient amount of stock. So if you need fast access to additional stock or help with your cash flow, apply for Inventory Finance today, or find out more with Rangewell.

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David Harrison

David Harrison

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