Pros And Cons of Financing Your Inventory with Small Business Loans.

Cash is king when it comes to starting and growing a small business. Per Electronic Transactions Association, 51% of small businesses turn to loans to finance their inventory needs. 

However, obtaining small business financing from traditional banking institutions is a bane for less experienced owners. Lack of solid trading history, considerable business finances, paper-laden application processes, and prolonged approval times are a major turn-off. When you need money quickly to meet demand, you may need to look elsewhere.

Luckily, online lenders offer favorable small business financing like inventory loans, working capital loans, and equipment loans with little paperwork and an easy application process. Whether you need cash quickly to keep your shelves replenished, expand your inventory, or pursue new product lines, an inventory loan can be a huge boost.

What’s Inventory Financing

As the name goes, inventory financing is a type of specific loan obtained from a lender to purchase business inventory. The products you intend to buy with the loan act as collateral against the loan. This type of loan comes in handy when you have longer sales cycles or can’t obtain small business financing from traditional banking institutions due to bad credit or lack of business history.

Product-based SMEs can benefit from this type of small business financing. But before you jump, you need to weigh the pros and cons of financing your inventory with this type of small business financing so that you make an informed decision. 

Pros of financing inventory with small business loans

Quick and easy to obtain

Less paperwork, low barrier to entry, low closing costs, and short approval periods make inventory loans a good option when you want to cover an unexpected spike in demand.

It doesn’t affect your business credit

Though it won’t help you build your business credit, it also doesn’t raise your debt-to-income ratio or affect your credit score if you run into problems paying off the loan.

It helps you prepare for peak seasons

When coming out of a low season, you may not have enough funds to purchase a large inventory for the upcoming peak season. Using the little money you have on hand can result in serious cash flow gaps in your business. At such times, financing your inventory with a small business loan is a great option to secure the funds you need to prepare for a busy season without draining your business accounts.

Expand your inventory or pursue new product lines

Stockouts can result in lost sales revenue and unsatisfied customers. The catch is, you can’t purchase stock without cash, and you won’t generate some money without inventory. Financing your inventory with a small business loan can help you expand your business inventory and pursue new product lines without depleting your working capital.

Payable within a short time

A small business inventory loan is usually paid as you sell out your inventory and usually lasts within the lifespan of the inventory. Unlike long-term loans that may be hard to pay during low sales seasons, you can pay inventory loans within weeks or months after selling out your stock.

Cons of financing inventory with small business loans

Higher monthly payments

Inventory loans are usually short-term debt and come with higher monthly payments compared to long-term loans. If the stock doesn’t sell out as quickly as expected, it can result in cash flow strain and make it harder to make monthly payments.

Higher interest rates

The products you purchase with an inventory loan act as collateral against the loan. Since no personal or any other business asset is pledged to cover the loan, lenders consider inventory loans less secure and charge higher interest rates to make up for the risk.

Restriction apply

Unlike term loans or business lines of credit, you can’t use part of the loan proceeds to cover utility bills or meet payroll. The full loan amount must be put towards purchasing business inventory.

Doesn’t help you build business credit

Lastly, you won’t be able to build your business credit score with this type of business financing because lenders don’t report inventory loan payments to the business credit bureaus.

Obtain an inventory loan for small business financing

Whether you want to prepare for peak seasons, pursue new product lines, or expand your current inventory to meet demand, an inventory loan can provide a quick bailout. The best way to obtain an inventory loan for small business financing is through an online lender. The application process is easy, and you’ll get approved within days.

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