What is Inventory Financing?

Inventory Financing Potential Candidates:

• Companies that maintain marketable raw materials or finished products
• Companies that sell their products at a brick and mortar location that accepts credit cards

*(Inventory Financing is a unique Business Funding Product please take a look at our detailed breakdown of how Inventory Financing Works).

Inventory Financing will typically award a financing based up to 85% of the appraised value of the products or 50% of the cost of the products (The final approval will be based on the lessor of the two values). In some cases, highly marketable products, i.e., the latest electronics, can be appraised at 60% to sometimes even up to 70% of the cost of the products.

For companies with less than $1mm worth of products at the time of applying, the approved

Loan or Line of credit will be based solely off of 50% of the cost of the products. Once a company’s value of products on hand rises above $1mm, their file can then be eligible for either up to the max 85% of the appraised value or the current level of 50% of the cost of the products. (Once again underwriting will base the revised approval amount on the lessor of the two values). All lenders will typically use a method called Net Orderly Liquidation Value (NOLV) or Forced Liquidation Value (FLV) to determine the appraised value of the products.

{Net Orderly Liquidation Value (NOLV) means a professionally appraised opinion of the estimated most probable Net Cash Proceeds which could typically be realized at a properly advertised and professionally managed liquidation sale, conducted under orderly sale conditions for an extended period (Which for Inventory Financing purposes is usually a 2-3 months window).

Forced liquidation value (FLV) is the amount of capital that an entity will receive if it sold its assets in an auction immediately.} The idea behind this forced liquidation value is to get an estimate of the financial position of the company in the worst possible situation and circumstance in the event of a default by the borrower and assets needed to be recovered. *Please keep in mind that (NOLV) and (FLV) tends to be significantly lower than the current market value of the products being pledged for collateral. Which can tend to affect the ability to leverage the full value of the products?

Upon final approval of the underwriting process, the company will be awarded a Business Line of Credit or a Business Loan that is secured by the appraised value of the collateral.

The decision of which funding option between a Business Loan or a Business Line of Credit secured by the collateral, in our opinion, should be determined by how quickly the company expects its Inventory to sell.
For instance, if a company expects their Inventory to turn over quickly, then it would make sense to have a shorter loan term or Business Line of Credit handy.
Conversely if the company expects their Inventory to take a while to sell. Then it would make sense for the company to pursue a longer-term loan.

Once the last steps are finalized, a term sheet will be issued detailing the terms and conditions of the Inventory Financing funding. To draw down on the funds, typically, all the company has to do is submit a draw request to the lender, who deposits the funds in the business checking account. The Inventory Financing funding is regularly paid down as the product is sold off to customers. As Inventory is sold, a portion of the proceeds is used to pay back the financing to the lender, who then remits the balance owed to the company less finance charges.

Please keep in mind that while a business’s Inventory is waiting to be sold. The company needs to keep track of all of the products, to make sure that they stay in good repair and shape.
A lender has the right to inspect the Inventory to make sure it has retained its value, and most will exercise that right periodically.

The amount a company can borrow with Inventory Financing can grow, since the funding is tied directly to the amount of Inventory the company has on hand. As Inventory is added, the company can continue to request funding from the secured Business Line of Credit or Business Loan, which can grow or shrink depending on customer orders.

If a company has already exhausted other Business Financing options (e.g., Factoring, ABL, Unsecured Business Line of Credit, etc.) Then converting Inventory into extra capital on hand to reinvest into the business can take a company from stagnant and idle and boost it up to a company that is growing and capturing market share.

Inventory Financing Credit Limits can range from $100,000 – $5,000,000+

The amount of capital funded can grow as the company increases the amount of Inventory on hand

Inventory Financing allows companies to leverage the current and future Inventory for capital

Advance Rates starting from a minimum of 50% of Inventory Cost could free up a lot of capital depending on a company’s current levels of inventory.

As with other forms of Business Financing, the principal owners of the company will need to have the right to excellent credit scores.

Most lenders will also look at the credit score of the business that is applying as well.  First a company’s initial application and financials have to be approved to clear credit and financial stability requirements needed to proceed.

Due to the variance in loan terms, companies need to take into consideration the total cost of the capital being awarded before agreeing to any Inventory Financing contract.

A company must maintain and provide accurate financial statements to verify the company can support the Inventory Financing.

Most lenders may also require a Business Plan or Strategic Action Plan to showcase both what the company plans on using the funding proceeds and how the company intends to pay the funds back.

The company’s Inventory or raw materials must be marketable.

All lenders will want to review a detailed list of the Inventory that the company intends to finance, along with their specific values.

Companies need to have a minimum of $250,000.00 in Inventory.

A company must already use an inventory management system that is reliable.

The company’s principals will need to explain which inventory valuation method the business is using—Whether (FIFO, LIFO, or average cost).

• First-in, First-out (FIFO): Under FIFO, it is expected that the Inventory that is the oldest is being sold first. The FIFO method is the standard inventory method used by most businesses. FIFO provides a lower-cost inventory because of inflation; lower-cost items are usually older.
• Last-in, First-out (LIFO): LIFO is a newer inventory cost valuation technique (used since the 1930s), which expects that the latest Inventory is sold first. LIFO places a higher cost to Inventory.

(The next step will be to conduct an appraisal of the products. One of the possible downsides of this Business Financing option is that it requires a lot more upfront due diligence, than other business financing options. This is because the Inventory needs to be inspected and appraised. These appraisals are typically conducted by third parties who must travel to your plant, warehouse, or third party fulfillment facility. Companies need to be prepared that initial costs vary based on the size of the facility and the complexity required to establish a secured business line of credit. Also, lenders will need to monitor the company’s inventory regularly, usually every 3 to 6 months. At times these examinations can tend to add to the maintenance cost of the Line).

A Third-Party company needs to perform a field examination of your Inventory to appraise your Inventory and raw materials.

Underwriting will also need to review the companies accounting system.

Underwriting will require running a test of the company’s inventory system.

It’s important to note that only the approved Inventory will be considered in any new borrowing base.

Approved Inventory can be defined as the following:

• Goods for which a company can provide proof of purchase 
• Goods that have been previously entered into/managed by the company’s in-house inventory management software
• Products whereby the manufacturer packaging is still in good condition