Inventory Financing: A Complete Guide

Inventory is like­ the building blocks of a company's supply chain. It includes raw materials, complete­d items, and unfinished goods. Disruptions in these components can impact production volume, especially with extended inventory conversion periods, leading to delayed profitability. In such cases, inventory financing emerges as a preferable solution to address the financial gap.

What is Inventory Financing?

Inventory financing offe­rs a short-term financial fix where businesses use their inventory as collateral. Loan providers determine a funding perce­ntage percentage based on this inventory and give out loans. This is key for businesses that handle sizable amounts of inventory. Based on the company's inventory, the intere­st rate and loan amount vary with each lende­r.

The lender determines a percentage based on which the loan is granted. Whenever a business repays, the financier removes the lien on its stock. 

Types of Inventory Financing

Now that you know what inventory financing is, let’s explore its various types:

Inventory loan

This form of inventory financing is suitable for businesses requiring prompt financial assistance. In such instances, a company secures a loan by leveraging the worth of its inventory as collateral, enabling it to navigate a cash flow challenge.

Inventory line of credit

An inventory line of credit is a continuous financing option instead of an inventory loan. A credit limit is authorised by the lender, and the borrower can take out funds from it as often as needed. Companies can pay for unexpected costs with money drawn from an inventory line of credit.

Eligibility Conditions for Inventory financing

Here are some common qualifying conditions for securing inventory financing loans:

• Eighteen years old is the minimum age requirement. 
• The individual must be an Indian citizen.
• Candidates must not have a history of credit defaults with any financial institution.
• The business must remain open and operating in the same geographical distribution for at least a year. 
• A sizeable yearly turnover rate (the precise amount may differ depending on the lending institution)
• Businesses submitting applications ought to have a strong credit standing.
• The company needs to have a consistent track record of profitable sales.

How to apply for inventory financing?

Every financial institution follows a distinct application procedure yet shares a common approach. The following are the steps involved in applying for loans related to inventory financing:

Step 1: Gather your financial details

Collect these financial documents to showcase your business's financial health:

• Balance Sheet for an overview of your liabilities, and assets.
• Profit and loss statements that reflect your business's financial performance.
• Business bank statements are used to check your financial transactions.
• Sales forecast to estimate your projected sales over a given time frame.
• Inventory list and management records that detail your stock holdings and inventory control procedures.
• Business Income tax returns, which display the tax history of your company.

Step 2: Begin with the application process

There are two options to apply for invoice financing loans. Either by visiting the nearest branch of a financial institution or to use their online platform, you have to fill out an application form with basic details. Submit this form along with the financial documents you've gathered.

Step 3: Provide additional documents

To ensure a comprehensive review, you must attach the following additional documents to the invoice financing application:

• Passport-Size photographs 
• Financial documentation supporting income proof
• Personal income tax returns (ITRs) 
• KYC records
• Certificate of Company Registration
• Business PAN card containing registration for sales and GST
• Address proof of the business

The lender will check your application, check your inventory, and determine your credit score after you've submitted everything. They will then suggest loan conditions. The loan will be approved if you accept and offer your inventory as collateral.

To sum it up, diving into inventory financing arms your business with financial resilience. Know the types, meet eligibility, apply, it's your roadmap to streamlined supply chain management and lasting success.