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Pros and Cons of Business Inventory Loans
July 30, 2018
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Pros and Cons of Business Inventory Loans

Not having enough cash on hand to purchase inventory can hurt your business, especially if your sales volume is highly seasonal. However, even if your sales stay fairly steady throughout the year, not having inventory on-hand results in missed opportunities. This is a problem that many entrepreneurs face.

In fact, according to recent data from the Electronic Transactions Association, 51 percent of small business owners cite inventory as their reason for borrowing money.

Fortunately, inventory loans are one of the many options available if you need short-term cash to replenish low inventory. Unlike other types of credit or loans, though, inventory loans are specifically designed to meet a variety of inventory needs.

That said, inventory loans aren’t without certain drawbacks. To help you make sense of the downsides and the benefits of an inventory loan, this blog post will review the pros and cons of business inventory loans.

Pros of Business Inventory Loans

1. Provides a Short-Term Cash Infusion for Inventory Purchases

When you find yourself with low inventory but don’t have cash to replenish it, it may seem as though there’s no viable solution. After all, without inventory, you can’t generate sales, and without them you can’t purchase more inventory.

Luckily, an inventory loan helps you get out of that difficult spot. With your inventory loan, you can purchase the appropriate amount of inventory, and in-turn improve your business’s sales moving forward.

2. The Cash Can Be Used to Expand Product Lines

With an inventory loan, you don’t have to solely focus on getting your inventory to an adequate level. Instead, you can use inventory loans as a tool to expand your product lines, which will enable you to increase sales. Due to this, an inventory loan gives you the flexibility to expand without draining your business’s cash.

3. Well-Suited for Small to Medium-Sized Seasonal Businesses

According to QuickBooks, inventory financing is often most suitable for small to medium-sized retailers. However, that also holds true for many other types of businesses that require inventory, but don’t have the financial history or capital to obtain a traditional loan. In other words, if you can’t get approved for a bank loan but you need inventory, an inventory loan may be the right choice for you.

Cons of Business Inventory Loans

1. Inventory Loans Can’t Be Used for Other Financing Needs

As you may have guessed, inventory loans have clear restrictions on what you can use the funds for. This makes inventory loans very inflexible compared to other forms of financing such as a line of credit. For example, with an inventory loan, you won’t be allowed to use the funds to meet payroll or pay taxes. Of course, if all you need the loan for is to purchase inventory, then restrictions on the use of funds won’t be an issue for you.

2. Inventory Loans are Relatively Short-Term

Compared to a typical term loan, inventory loans are generally paid off over a shorter period. In fact, the term of most inventory loans will coincide with the lifespan of the inventory. This means that the balance of the loan will be repaid over a shorter period, which may result in larger monthly payments.

If you can’t afford the monthly payments, an inventory loan can put a strain on your business’s cash flow. However, as long as you don’t overextend yourself, this won’t be a problem. You can always opt for a smaller loan balance if you’re worried you won’t have enough cash for a monthly payment.

3. Less Suitable for Large Businesses

A larger business with the assets and track record to secure institutional-sized financing may be better off not using inventory loans. The most cash inventory loans generally provide is only about $500,000. Of course, that may be plenty of cash a for small or medium-sized businesses. However, a very large company, such as a Macy’s or Walmart, needs huge amounts of capital for inventory, and an inventory loan is typically not meant to provide that.

Conclusion: A Flexible Solution for Many Businesses

It’s important to note that there are a variety of inventory loans. So, when it’s time to choose a loan, you should weigh this list of pros and cons along with your business needs and the specific terms of the loans you’re considering.

Then, with all those factors in mind, you can make the best decision possible for the long-term health of 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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