How to Apply for an Inventory Loan
However, not all of them are savvy enough to use an inventory loan, which is often a much more effective way to borrow money for inventory when compared to a traditional loan. That said, there are certain factors unique to inventory loans that you must consider during the application process.
In this post, we’re going to review how to apply for an inventory loan, so that you can ensure that it’s the right financing option for your business.
Apply for an Inventory Loan in 5 Steps:
1. Decide How Much Inventory Your Business Requires
The amount of inventory you need will affect how much money you should borrow, which may affect other terms of your loan. For example, the larger your inventory loan is, the larger your monthly payment will be, assuming all else is equal. The amount of your loan may also affect fees, interest rates, and even your chances of approval.
When you calculate how much inventory your business requires, you should also closely examine your business needs. Understanding your unique needs is critical, as 29 percent of small businesses fail because they don’t have enough capital. Consider how your sales volume has fluctuated in the past and be conservative with your estimates, especially if you’ve never used an inventory loan before.
2. Identify What Type of Inventory You Need to Purchase
You must consider what type of inventory you need because the supplies that you purchase will serve as your collateral on the loan. In other words, if you default, your lender is protected because they can take ownership of the inventory you bought with the proceeds from the loan.
Generally, the more difficult it is to liquidate the inventory you purchase, the more you’ll have to pay in interest or fees on the loan you use to buy that inventory.
It’s also important to keep in mind that your track record as a business owner is a key consideration for your lender. So, if you purchase inventory that you’ve successfully sold in the past, the lender will take that into consideration and potentially give you a better deal.
3. Calculate the Total Cost of the Loan
Understanding the cost of your loan in total dollars is especially useful if you’re comparing loans with different terms. Loan terms may vary quite a bit, and just because one product has a lower interest rate than another doesn’t always mean it’s a better deal. Plus, without understanding the total cost of your loan, you can’t judge how it will affect the profitability of your sales.
4. Understand Your Opportunity Cost
In addition to understanding how much your inventory loan will cost, you should also know how much not obtaining that loan will cost you. Otherwise, you could overlook an inventory loan that will give your business a notable boost. To understand your opportunity cost, you can run projections based on what would happen if you didn’t take out an inventory loan.
For example, let’s say you run a retail store that makes most of its sales during the holiday season. If you don’t have enough inventory to meet your customers’ needs, you could be losing out on significant sales. That’s why, even if an inventory loan cuts into some of your profits, you’re still better off than you would be if you ran out of inventory.
5. Gather Your Information
Your lender will require information about your business, including your industry, revenue numbers, bank balances, existing loans, and more. You’ll also need to tell the lender what you’ll use the funds for, and how much you’re requesting.
Different lenders may require different information, so be prepared. It’s always a good idea to communicate early, be transparent, and follow up with your lender to establish a strong working relationship.
Inventory loans can be a very powerful financing tool for your business This is especially true if you run a business that has highly seasonal sales volume. They can also be useful if you have an opportunity to purchase supplies at a temporary, discounted rate.
However, like any financial decision, you should evaluate your business needs carefully before committing to anything. If you have questions, ask the lender. Once you understand the benefits and downsides for your business, you’ll be in the ideal position to make the right decision.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.