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If your business is based on selling different products, it can be tough to finance the substantial amount of inventory that you need periodically. What’s worse, many lenders are hesitant about approving new and small businesses for that much credit because they are looking for more return on their investment. A good option to finance your inventory is through inventory financing.
Depending on what products you sell, as well as the overall size and popularity of your business, you may have to dedicate thousands, even tens of thousands of dollars a month toward inventory shipping and restocking costs. To help cover these costs
Inventory financing comes in two forms: an installment loan or a business line of credit. Both forms are secured against the inventory you buy. Inventory financing is generally beneficial to businesses that require large amounts of inventory. This may include restaurants, car dealerships, and retailers.
With asset-based financing, anything can be used as collateral for the loan such as the equity in a commercial building or another valuable property, vehicle or piece of equipment. On the other hand, inventory financing uses the inventory you buy with the loan as collateral.
As mentioned, there are two forms of inventory financing. Both options can benefit your operations greatly and even help your business credit score. However, it’s important to choose an option based on the unique need of your business.
An inventory installment loan works like a secured business loan, wherein a lump sum of liquid cash would be deposited into your bank account several days following approval. You would then repay your borrowings through divided installments, with the possibility of prepayments (earlier or larger installments). If you default on the loan, your lender can seize your inventory to recoup payment.
Rather than getting a lump sum loan, you can finance your inventory through a business line of credit. This will allow you to withdraw funds from a revolving line of credit, whose funds you can reuse as you pay it back. Interest is only charged on the amount you use and the principal doesn’t need to be paid until the draw period is over.
Learn how to get the best rate for a line of credit in Canada.
As a business owner, you’ll have to think about where you will acquire the funds necessary to finance and move enough inventory. If it looks like you’ll have to spend too much personal income to make these purchases, it may be time to consider financing.
Inventory financing is a common solution for businesses such as:
While every lender has different approval standards, most will only consider your operation eligible for inventory financing if:
To earn high approval odds, a low rate, and a favourable repayment term, take these steps prior to applying:
Do you have bad credit? Check out how to get a small business loan with bad credit.
Although there are other ways to pay for your inventory, financing it with a term loan or a business line of credit might be more cost-effective. However, it’s important to weigh the positives and negatives of inventory financing.
Learn how to manage small business inventory.
Inventory Financing FAQs
What is the “Due Diligence” process?
What happens if I default on payments?
What fees can I expect from inventory financing?
If you’re interested in financing your inventory with a term loan or business line of credit, there’s no better place to apply than Loans Canada.
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