Relying on your cash flow to obtain products from overseas suppliers can cause unnecessary stress. This is where unsecured inventory finance comes in.
Unsecured inventory loans are designed to pay your supplier directly on your behalf, allowing you to meet your financial obligations while keeping your shelves stocked and your business's reputation intact.
How does unsecured inventory finance work?
The "unsecured" part means that you don't need to provide security when applying for funding. Here's how it works:
The lender pays your supplier
The supplier ships the goods and you restock your inventory
You sell your goods and repay the lender
Funding is usually granted with a director's guarantee and, depending on the lender, you can apply for up to $1 million. The repayment period is determined by how long it would take to sell your inventory.
A shorter loan term may mean a higher interest rate, but if it's a small amount, it makes financial sense to repay quickly. Paying interest on a small loan over a longer period will eat away at profits.
What businesses use unsecured inventory finance?
Generally, unsecured inventory finance is used by manufacturers of consumer products and auto dealers that have money tied up in inventory. Usually, the business will be ordering from overseas suppliers, causing a delay between paying the supplier and receiving the goods. This causes cash flow issues.
What are the benefits?
Here are a few reasons why unsecured inventory finance might be the right fit for your business:
No security required. You are not required to declare your assets as security when applying for this loan. This is ideal for small businesses who need a quick solution to cash flow issues and don't want to put up property as collateral.
Ideal for overseas suppliers. Shipping inventory from overseas can mean significant delays, especially if you have to put off paying your supplier. An unsecured inventory loan can expedite shipping, helping to eliminate unnecessary delays.
Avoid using working capital. You don't have to dig into your working capital to unlock cash flow.
Enhance your business profile. This solution can also help boost your business profile because you're able to take on bigger orders, which will increase your business capacity and maximise turnover.
What should I keep in mind before applying?
There are a few points to consider before applying:
What is the nature of your inventory? Slow-selling inventory may not be ideal for this type of finance is you may not find a lender.
What is your credit like? You will generally need good credit to be eligible for unsecured inventory finance.
Are you confident in your inventory? Remember the lender has the right to inspect the inventory to ensure it's maintained its value and that you keep track of your inventory.
How serious are you? As there is a lot of due diligence involved, a lender may make initial assessments and present a preliminary offer prior to a thorough review. You may be required to pay a due diligence fee before a final offer is made.
How to qualify for unsecured inventory finance
Lenders want to see that you're able to make repayments, so you need to prove that your business is in decent shape financially. While you don't have to put up collateral for an unsecured inventory loan, your business must meet a few criteria.
Time in the industry. Lenders usually require that your business has been trading for at least two years.
Minimum annual revenue. You must show your annual earnings. Minimum earning requirements differ from lender to lender.
Credit defaults. Defaulting on existing financial commitments shows lenders that your business is not in a position to take on another loan.
Industry type. Whether or not a lender will approve a loan depends on your industry. If your business type is considered to be volatile or unpredictable, your application might be rejected.
What will I need to apply for inventory finance?
While this will vary from lender to lender, it is a good idea to collect and assess the following documents prior to applying. There is a good chance that inventory finance lenders will want to look at:
Balance sheets: Having accurate balance sheets for at least two financial years.
Profit and loss statements: Having accurate profit and loss statements for the current and previous two financial years.
Business tax return: Will help the lender assess the revenue history of the business.
Personal tax return: If you are a sole trader or have recently started a business, this may be required by a lender.
Current inventory list: An itemised list of all the inventory that is currently on hand.
Inventory management records: These will help to show the lender how quickly inventory has turned over historically.
Sales forecast: Well-constructed forecasts will help a lender assess the feasibility of invoice financing as an option for your business. You can compare invoice financing products below.
Along with reviewing the above documents, a lender may want to send an independent auditor to your business. This is in order to ensure that inventory financing is a good solution for your current operations and to mitigate their risk.
Unsecured inventory finance can be a convenient option to keep your business moving, but make sure you compare your loan options before you apply to ensure you get the right financing for what your business needs.
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Elizabeth Barry is the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review.
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