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How to Get Approved for an Inventory Loan with a Bad Credit Score
May 08, 2018
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How to Get Approved for an Inventory Loan with a Bad Credit Score

As a business owner, you may think that without a high credit score, you won’t be able to obtain financing at a reasonable price, or at all. Of course, having a good credit score opens up many doors is beneficial, but it’s still possible to qualify for and receive additional business financing. One example is an inventory loan, which is financing that can be used to purchase items that you’ll sell or use to operate your business.

One financing option that can be a great fit for you, even if you have a bad credit score, is an inventory loan. That’s because, with an inventory loan, you have other ways—besides your credit score—to show potential lenders that you can be a good borrower. In addition, there are several inventory loan options available that don’t necessarily require an excellent credit score.

In this post, we’ll explain how you can increase your chances of getting approved for an inventory loan, even if you have a less-than-stellar credit score.

Understand the Lender’s Point of View

As previously stated, the funds from an inventory loan can be used to invest in inventory that you’ll sell or use for operational costs. It’s important to remember that the inventory that you purchase with your loan will be used as collateral by your lender. If you’re unable to repay the loan, the lender can take possession of your inventory. This is done so that the lender can protect themselves in case they aren’t fully repaid.

However, if selling your inventory is difficult or time-consuming to sell, the collateral doesn’t give the lender much protection. For simplicity’s sake, imagine you were applying for an inventory loan and all that mattered was your credit score and the value of your collateral. In this scenario, the less valuable your collateral is, the more your credit score matters, and vice versa. Ultimately, it’s important to consider the lender’s perspective. Then, present strong aspects of your business that will make them want to qualify you, despite your low score.

Show a Verified Sales History

 With a bad credit score, you’ll be under extra scrutiny, but showing a strong sales history can make lenders much more likely to provide you with an inventory loan. Keep in mind that this sales history shouldn’t just show that the product can be sold. Rather, it should show that you can sell this product. When a lender supplies you with a loan, they’re investing in you and your business.

Ultimately, the last thing lenders want is for you to default. So, show them the numbers that prove you can turn your inventory into cash.

Project Sales Numbers

The logical next step to ensuring your loan application gets approved is to create detailed breakdowns of your projected sales numbers. The purpose of this is twofold. The first is intuitive; you’re doing the analysis so the lender can understand exactly what they’re investing in.

However, you’re also doing the analysis to show the lender that you’re not being careless. Lenders want to know that they’re dealing with professionals, and a thoughtful sales projection analysis will show them that. If you’re not good with numbers, have a professional put your sales projections together for you.

Show Lenders that Your Products Sell Quickly

As previously mentioned, the inventory you purchase is the lender’s final recourse. So, ideally, you’ll use the proceeds of your loan for a product that is relatively easy to liquidate. That way, in the worst-case scenario, the lender can recoup at least a portion of their losses. Knowing this, you should consider only proposing using the funds from your inventory loan for products with a relatively short sales cycle.

By doing this, you help take away some of the lender’s downside risk, which means they are less likely to get hung up on your bad credit score.

Conclusion

Inventory loans are popular among small to medium-sized retailers, particularly businesses in the retail and wholesale industries. This is because these types of businesses succeed or fail based on whether or not they have the inventory they need to meet their customer’s demands. However, don’t assume that just because you don’t run those types of businesses that an inventory loan won’t be a fit for you.

Inventory loans, while they are only used to finance inventory purchases, can be structured as term loans or lines of credit, which makes them a flexible option for many small business owners. Additionally, if you’re looking to capitalize on peak selling season or just don’t have the available cash to purchase inventory, an inventory loan may be a viable option for your business.

Fora Financial

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.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].
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