Did you know that more than half of small business owners are always in need of funds to buy inventory? Retail and wholesale businesses, in particular, need additional financing to cover cash flow problems like late invoice payments or seasonal sales slump.
Business owners know how important back-up financing is when it comes to situations like this. That is why most of them opt to take out inventory financing to help cover unexpected costs or stock up on inventory.
Other than keeping your warehouse stocked, inventory financing also allows you to take advantage of opportunities from suppliers. Since it doesn’t require additional collateral, as the inventory serves as the collateral for the loan, it’s the perfect loan option for small businesses.
Compared with other financing options, applying for inventory financing is faster and involves less paperwork. Alternative lending companies even allow their clients to submit their documentation online. However, despite the simple process, inventory loans are not the easiest financing to get. Certain factors can affect your eligibility and may affect your chances of approval.
Here’s a step by step guide to help you in applying for inventory loans:
- Determine Much Inventory You Need to Purchase
The amount of inventory you need will affect how much loan you need to take out to purchase additional inventory. Essentially, the higher the amount you need, the greater your repayment will be. Your interest rate, repayment amount, and duration for repayment will also depend on the lending manager’s assessment of your finances.
In the process of determining how much inventory you need, you also have to consider what your business needs. Your capital will greatly matter because if you lose control of your cash flow, you’re business will eventually fail. If you haven’t worked with inventory loans in the past, it might be helpful to be conservative with your business finances.
- Gather All the Necessary Documents
Your assigned lending manager will want to look at the financial status and stability of your company. To do this, they will require you to submit financial documents that will show your company’s assets, debts, as well as your loss and profits. Compiling these documents is the first step of the actual inventory financing application process.
To apply, business owners should submit the following financial records:
- Balance Sheets
- Inventory List
- Sales Forecast
- Personal and Business Bank Statements
- Profit and Loss Statements
- Inventory Management Records
- Personal and Business Tax Returns
- Complete Your Application Form and Submit the Necessary Documents
Now that you have a clear picture of what your business needs and you’ve gathered all your documents, it’s time to fill out the application form. You may need to provide necessary information such as the owner and business name as well as the loan amount. Some lending companies might require business owners to have their finances audited by a third-party. So, before you submit the requirements, be sure to check the guidelines of banks or alternative lending companies.
Once the lending company has completed a run over on your application and considers you a good candidate, they will contact you and brief you about the period of the due diligence process. This part is important because it lets the lending companies verify all the information you provided about your business.
- Sign Initial Agreements
Many lenders will offer business owners a preliminary commitment contract that allows them to lessen the risk in case you fail to follow through with the loan. The length of the due diligence process can be lengthy and there is a big chance that companies may back-out on the loan.
- Complete a Business Audit
As part of the due diligence process, the lenders will send a representative that will assess the situation of your business. They will personally visit your company to check your inventory and evaluate your eligibility for inventory loans. Oftentimes, they will also examine the inventory management system you have in place.
- Pay the Fees
Once the process of due diligence is complete, the lenders will offer business owners with an initial agreement outlining the terms and the amount of loan they can offer. However, this won’t be the bank’s final offer. When you decide to push through with the loan, some banks will require you to pay a due diligence fee to consolidate your intention of going through with the loan.
- Wait for Approval and Review the Offer
Now that you’ve handed over your documents and the due diligence process is over, the only thing left is to wait for the approval. By the end of the representative’s visit to your business site, you might have an idea of where you stand on approval.
Once the bank approves your loan, be sure to review the terms. Check if it meets your repayment capability and if the repayment amount is realistic when compared to the repayment period. The last thing you want is to end up taking out another loan to pay for your existing one.
- Sign the Contract
If you agree with the terms provided by the bank, it’s time to complete the paperwork and sign the contract. Be sure to double-check the interest rates, loan amount, and terms. Once you’ve signed the contract, you can expect to receive the funds within a few days.
Apply for an Inventory Loan Today
Many business owners often underestimate how inventory financing helps in maintaining stable cash flow. If you run a product-based business with a high turnover rate, then this can be a perfect financing option for you. It offers a lot of benefits that other loan options cannot provide. If you want to learn more about small business loans to help with your cash flow issues, talk to one of the experts in your area.