Keeping the shelves stocked with the merchandise your customers want to buy is an important part of running a successful business. Under the right circumstances and with the right loan terms, leveraging inventory loans can be a smart business move. This is particularly true if you have an opportunity to buy that inventory at a discount.
Loan Terms Matter When Purchasing Inventory
How quickly your inventory turns will point you at the loan terms that make the most sense for your business. For example, if you expect your inventory to turn in three or four months, it might not make sense to borrow money with a three- or four-year loan term. A shorter term might be more appropriate.
If you’re still paying this year for inventory you purchased last year (or two years ago) with a longer-term loan, it might make it harder to purchase inventory now. At least it could make it harder to borrow this year. Think of it the same way you would think of purchasing a car. You likely would not purchase a new car with a 30-year loan; it would make the overall cost of the car very expensive. And, who wants to still be making new car payments on a 25-year old car?
It’s possible a longer-term loan will have a lower annualized interest rate, but the total cost of the loan will likely be higher. Conversely, a short-term loan may have a higher annualized interest rate, but the total cost of the borrowed funds will likely be less (of course the periodic payment will likely be more). When you consider a small business loan for buying inventory, you should consider a number of factors, including the overall cost of the loan. Does it make financial sense, or will the total amount of interest you pay consume all of the profit in the merchandise you intend to sell.
A Business Line of Credit for Purchasing Inventory
Another way many business owners finance inventory purchases is with a business line of credit. Unlike a term loan, a line of credit allows the business owner to access part, or all, of the credit line, repay it, and access it again as needed. What’s more, interest is only charged on the credit the business owner uses.
The flexibility of a line of credit allows the business to access funds when needed without going through additional credit approvals during the term of the credit line. When you open a line of credit, you’ll receive access to a stated amount of funds to use as needed.
Does an Inventory Loan Make Sense for Your Business?
There are certainly costs associated with borrowing that need to be considered, but if the total cost of borrowing enables your business to generate more profits, it could be a good decision—provided the numbers make sense.
What type of loan makes sense for your business?
Financing options to help you grow your business
If you’ve ever heard the adage, “It takes money to make money,” you must be a small business owner. Fortunately, there are more small business loan options available today than ever before—you just need to know where to look and what to look for. You don’t need to be a financing expert to build a successful business, but you do need to consider all the business loan options available to determine which one is best to meet your business need.
Unsecured Small Business Loans
An unsecured business loan is simply a loan from a lender that does not require any form of collateral from a business or a business owner. This is based solely upon the creditworthiness of the applicant.
Many small business owners are interested in a loan for their business but don’t have the specific collateral a bank may require, such as specifically-identified real estate, inventory or other hard assets. Fortunately, there are lenders like OnDeck that do not require that their loans be secured by specific collateral, relying instead on a general lien on the assets of the business. These may be good options for many businesses.
Secured Small Business Loans
Banks generally prefer secured—rather than unsecured—business loans. Secured loans are loans that are backed with some sort of collateral like real estate, equipment, or other valuable business assets the bank can seize and sell if the loan is not repaid.
Banks (or other lenders that require specific collateral) commonly determine what they refer to as the loan-to-value ratio of your collateral based upon the nature of the asset. In other words, your banker may allow you to borrow against 75 percent of the value of appraised real estate or 60 percent to 80 percent of the value of what they call ready-to-go inventory. Because lenders might consider their loan-to-value ratios differently, you’ll need to ask any potential lender how they intend to set that value.
Small Business Loans for Different Industries
As a business owner, your needs may be industry-specific such as ordering kitchen supplies upfront or bridging cash flow while you wait for insurance reimbursement. At OnDeck, we understand and we offer tailored loan options (with multiple loan types, amounts, and repayment terms), so you can get a loan best suited for your industry and business. Here are some of the most common industries we work with and the small business financing options available to them.