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Pros and cons of inventory financing

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Inventory financing is a creative way to help businesses that may not qualify to use more conventional lending sources to gain access to capital for the operation of their business.This option can be very useful to companies with little or no credit history or who have had trouble in the past but really need the capital to improve their business.

Inventory financing basically operates by awarding a line of credit to a company which is then backed or guaranteed by their inventory on hand.This can help companies free up money that is tied up in inventory to use for many different reasons.Most inventory financing options require a record of sales be provided to the lender to verify the market value of the inventory and to assess whether the loan is worth the risk involved.Lending is all about risk and a potential lender will ask for many different documents and other information to verify that you can really produce the needed income to make the payments on the loan.

For some obvious reasons, inventory financing only makes sense for some businesses and not for others.Only those with a real, physical inventory would qualify for this type of loan as it cannot be backed by services provided or anything similar that that business structure.Lenders are really only looking for businesses that have a history of consistent sales and some decent credit for inventory financing.They are really not interested in taking possession of your inventory should you default on the loan, but want to put assurances in place that their investment will be protected should the worst happen.It is typically not a good idea for startup companies to apply for this type of loan, because they won't be able to show a stable history of sales and inventory processes.

Inventory financing makes sense for you business when you are experiencing great inventory turnover rates, but just don't have enough cash on hand to keep the supply replenished or to undertake the growth operations you need to fund.It's also a good idea to use inventory financing if you have a warehouse that is full of products that are ready to ship but you just don't have the capital to start the next batch of production.It is also a good idea to secure inventory financing when you have to keep high levels of inventory on hand to keep up with demand, but the inventory ties up a lot of your cash.

There are several scenarios in which getting inventory financing just doesn't make sense.If you have obsolete or aging inventory or are simply not able to move it the way you could before, it's probably a bad idea to finance other parts of the operation on that bad inventory.Don't finance something with a bad asset that you won't be able to unload without significant loss to your business.You shouldn't add high interest payments onto the problem and make cash flow even worse.It is also likely that you won't even get approval for the loan if your inventory isn't very valuable in the market or is particularly difficult to move.This will make the process of seeking funding even more frustrating when you realize that you can't get the money you are looking for through inventory financing.

Whenever you are seeking funding of any kind, it's important to be realistic in your expectations and your assessment of the situation.It may be a good idea to hire a professional business finance expert who can guide you through the steps that will help you improve your business and make it more profitable and prosperous.Don't ever seek financing because you feel obligated to or because you just really would like to have more of it.Playing with credit can be dangerous if you don't make calculated risks and if you make decisions based on feelings rather than actual data.

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