E-commerce Inventory Financing - Complete Walkthrough

There are many sources of financing for an e-commerce business. If you have been diligent about savings, you can use that. The other option is to borrow from family and friends. However, there are instances when you may need business financing. You can get money from bank loans and credit lines. And, there is also the option of inventory financing, which we will explore in more detail below.

Understanding Inventory Financing

Lenders give inventory financing to help business owners buy inventory. It is a secured short-term loan or line of credit. The e-commerce owner uses current or future inventory as collateral. Inventory financing can be a lifesaver for a business that does not have enough cash flow. The lenders use specific criteria to determine who qualifies for the financing. Such include:

• It must be an existing business that has proof of purchasing inventory.
• A business that falls in the product or retail category. Service providers do not have tangible goods to use as collateral.
• Critical business metrics like inventory cycles, product demand, and logistical considerations.
• Track record showing strong sales performance.

Do note, the financing company may run a business credit check. The credit score will determine whether you qualify for financing. It also impacts how much interest the lender will charge. It is important to monitor the scores to check for inaccuracies or inconsistencies. Such include wrongful assigning of credit accounts to you. You can also identify incorrect credit debts on your account. Look out for misspelling of names and other critical information. Leaving such on the report can result in lower credit scores. 

Some companies offer credit repair management services to identify and correct such errors. Asking help from professionals when you don’t know how to proceed is the best way to go. They’ll know all the requirements and procedures to rectify mistakes.

However, a bad credit score may not always impact the ability to qualify for inventory financing. The inventory is their collateral. It gives them some form of security for the money they lend out.

Why Inventory Financing is A Good Idea

E-commerce owners get advantages from inventory financing in several ways. These include:-

• The ability to have stock at all times. It helps avoid disappointing customers because you sold out all the products. This is especially critical when selling trending items or during peak seasons.
• Inventory loans are an option to traditional ones that can be difficult to get. They provide a lifeline for businesses that may not have good credit. The money also helps when there isn't enough collateral to apply for normal loans.
• The financing can keep the business running when the markets are experiencing downtime.
• Excellent funding for wholesalers who need large volumes of inventory.

The main advantage of inventory lines of credit is that the waiting time is short. Within a few days, you know whether you have qualified or not. That means you can apply when you need to take advantage of market opportunities.

Disadvantages Of Inventory Financing

Inventory financing can save the business in critical times. But there are some disadvantages to such loans. These are:

• Inventory loans may be a bit more expensive when compared to cash purchases. Short-term loans have high monthly payments, which could strain the business.
• The interest rates also tend to be higher because they are not as secure as the more traditional loan. There is no guarantee that the inventory will sell within the specified loan period.
• Some lenders may need extra collateral depending on how they assess the situation.
• You may need to show the actual tangible product if the financier wants to carry out a physical check. The business owner will be liable for the appraisal fee.
• There isn’t too much flexibility with how you can use the money. Some lenders are specific on where the money goes. It means you cannot divert the funds to other aspects of the business.
• The lender bases financing on a part, not full appraisal value. The e-commerce on a budget must still look for some money to make up the difference.

Types Of Inventory Financing For E-Commerce Owners

Let’s look at the different types of inventory financing for e-commerce owners:

1. Inventory Loans

A lender gives an inventory loan based on the inventory value. The lender fixes a repayment period and the monthly amount the borrower needs to pay. There is also the option of lump-sum payment after the sale of the items.

2.  Inventory Lines Of Credit

Inventory lines of credit differ from loans in that the borrower can get money on an ongoing basis. It means the business can handle any unforeseen expenses. The other advantage is you can establish long-term funding with the financing company.

3. Debt Financing

The e-commerce owner can sell his debts to investors or individuals. You then agree on repayment terms for the principal amount and interest. Please note, whether you sell the stock or not, the creditors will expect the payments.

4. Work-In-Process Financing

Work-in-process (WIP) provides financing during the manufacturing process. The lender pays the supplier directly. There is a downside though. Getting a loan for the final product will need you to pay the WIP loan first. The lender will also have a very active role in the manufacturing process. They keep a close watch on every step because they need to know their money is safe. Some suppliers may not be very comfortable with the arrangement.

Final Thoughts

Inventory financing brings many benefits for e-commerce businesses. It allows for stock replenishment when you need to. Such financing can be the lifeline you need during peak times. You maximise the existing business potential by ensuring you have the product when you need it most. There are also inventory financing options, as we have highlighted above. Do assess your business needs before committing to any loans. Also, shop around for lenders, looking at their terms and policies.

Finally, make sure you make the payments so that it does not impact your credit. A poor credit score can impact your ability to get financing in the future. Lenders who will be willing to give you money will charge high interest rates. Keep checking your credit reports for any errors. Get the help of credit repair management service providers. They will track and correct such mistakes.