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STRAPPED FOR CASH FOR YOUR INVENTORY? INVENTORY FINANCING IN INDIA

SME Finance

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Posted on
Mar 28, 2017

STRAPPED FOR CASH FOR YOUR INVENTORY? INVENTORY FINANCING IN INDIA

It is the small business owners whose efforts will turn the economy around! One way to encourage that is to provide them access to quick loans. The small business owners who are looking to grow their business can do so with inventory loans.

A loan against inventory is a short-term loan that is used by a business to purchase inventory. The loan or line of credit is typically secured by existing inventory and sometimes by an additional lien on other business assets. Working capital loans for inventory can be a great financing tool for well-established companies with short-term inventory shortages.

Inventory financing is generally beneficial for retailers looking for financing with their cash tied up in inventory. For e.g., Mr. Shukla runs a grocery store and needs to fund his monthly purchases from various distributors or wholesalers and in the event of sales being down. He is cash strapped for funds for his next month’s purchase for a new variant that his competitors may have started selling. He can then pledge his stock or inventory as collateral to acquire funding. This enables churning of the money and enables retailers like Mr. Shukla to have enough products on the shelves. For wholesalers, this loan enables them to have a steady supply of inventory to fulfill incoming orders and replenish the inventory that leaves the shelves. For a seasonal business, inventory financing helps fund the busy season during the off-season.

As a general rule banks or lenders have their preference of giving out working capital loan to companies with an unswerving sales history on a proven product. This is to keep away from the unfortunate situation of a company defaulting on its loan. Therefore it is always advisable to test your product in the market with a working capital loan and then if successful it would be recommended to take up an inventory loan. This helps, as it is an ordeal for the bank as well as the borrower to be stuck with old inventory, which is belonging to the bank along with high-interest payments being due.

Generally, companies who consider taking up an working capital loan for inventory is when they have high inventory turnover rates, easily sold inventory and a clean balance sheet with little or no debt but most important of all it is a mature product with steady sales history. Companies, which have a high amount of debt and a new product line with no sales history generally, should not take an inventory loan.

An inventory financing can be taken from a variety of sources:

The Vendor: Vendors tend to give material or goods on credit and this is the quickest and the easiest way to purchase inventory when you are stuck up for cash. Their payment terms can be ranging from 30-90 days. However, there is a high inbuilt cost of vendor financing in the prices of the goods purchased.

Traditional Bank funding: This is a slow option but an economic one. Getting inventory loans from a bank is similar to any other approach to bank financing and these funds are used to purchase inventory. Your existing inventory will serve as a collateral for the funding and in case you defer to pay back the loan they can go after any business asset they deem correct.
FlexiLoans.com: There are a variety of online lenders that also provide inventory loans to borrowers. An online working capital loan or an inventory loan can be obtained from online sites. They are fast, flexible and collateral free. They are transparent with no hidden charges and also secure and safe.

Thus these are a few of the ways in which an SME can obtain funding to meet their working capital and inventory management needs and thereby aim to add to the economy with their growth.