Creative Inventory Financing Solutions for Startups and Growing Businesses

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YOUR COMPANY IS LOOKING FOR INVENTORY FINANCING!

FINANCING INVENTORY FOR SHORT TERM FINANCE NEEDS

You've arrived at the right address! Welcome to 7 Park Avenue Financial

Financing & Cash flow are the  biggest issues facing businesses today

ARE YOU UNAWARE OR DISSATISFIED WITH YOUR CURRENT  BUSINESS FINANCING OPTIONS?

CALL NOW - DIRECT LINE - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs

EMAIL - sprokop@7parkavenuefinancial.com

7 Park Avenue Financial
South Sheridan Executive Centre
2910 South Sheridan Way
Oakville, Ontario
L6J 7J8

 

WORKING CAPITAL OPTIMIZATION FOR INVENTORY FINANCING SOLUTIONS

 

Inventory financing in Canada.  What are the methods that Canadian business uses to ensure that working capital investment is maximized? How does inventory financing work?

 

The good news is that there are several inventory financing solutions for businesses in Canada - It is a valuable type of financing that allows a company to fund inventory and stock - Solutions such as supplier trade credit / vendor financing, purchase order financing, inventory loans and inventory finance solutions within asset-based lending ABL lines of credit are all available to the Canadian borrower and can help fund business expenses.

 

Each of these financing solutions is unique and has different benefits and potential drawbacks, so it's important to understand financing options that best match the needs of your business.  Let's dig in!

 

 

"Financing is not a one-size-fits-all proposition." - Barbara Corcoran

 

 

WHAT IS INVENTORY FINANCING 

 

Inventory financing is a type of short-term business financing that allows a business to either purchase inventory or use inventories as collateral for financing the business - That ability to leverage inventory helps in overall cash management when used in an efficient manner.

 

For a business selling products ( as opposed to service-based companies ), it is critical to maintain an appropriate inventory level without negatively impacting the company's cash position. That allows a business not to have to liquidate inventory or pledge other assets as collateral.  The ability to avoid more expensive forms of business financing eliminates the worries around the company's cash flows. Many firms are seasonal businesses in cyclical industries, requiring specialized financing solutions.

 

In many cases inventory financing from alternative lenders is easier to obtain than traditional bank financing. Many banks are hesitant to lend on inventory to the SME commercial finance segment of the industry. Those small businesses and medium-sized firms often require business capital the most but find it hard to access.

 

Many business lenders have particular inventory funding expertise not available in the SME banking segment in Canada.

 

The ability to access financing for inventories will also allow firms to benefit from bulk purchases from key vendors, and that strategy is also often accompanied by volume discounts - ie better pricing / more profit margin!

 

The worldwide pandemic reinforced the importance of inventory and supply chain management - talk about an example of market conditions demand fluctuating and focus on supply chain disruptions. 

 

Effective inventory financing and asset management of this critical current asset will always lead to better profitability and the ability to achieve long-term business growth.

 

When business owners/financial managers are challenged on how to finance inventories, it's important to focus on two areas - we'll call them ' tips' and ' traps'!

 

 

TRADITIONAL FINANCING TENDS TO AVOID FINANCING INVENTORY FOR A VARIETY OF REASONS

 

 

Financing inventory typically revolves around retail or commercial concerns and may involve a line of credit combination. Smaller retail businesses have a huge challenge as banks and other commercial lenders are reluctant to lend against inventory based on business credit score history or financial health. In many cases, they will demand the personal or business assets of the business owners as collateral. Compounding the problem is the fact they view that type of business as an ' all-cash ' business - so why would it need small business financing?

 

 

INVENTORY FINANCING LOANS

 

Typically when inventory is financed by a bank or commercial concern via business loans, it's important to realize that it's always financed at cost.  Another good thing to know is that in certain types of financing actual physical counts, inspections, or appraisals will be required by your inventory financing lenders - again, typically a bank or non-bank commercial lender.  That won't always be required, but it’s an absolute must on occasion. The lender needs to determine the ' margin formula ' they will lend against on an ongoing basis.

 

WHAT IS THE FORMULA FOR INVENTORY FINANCING?

 

While there is no specific formula around how different traditional and alternative business lenders address inventory financings, several key factors determine the amount of borrowing a company can achieve in pledging existing inventory or purchasing inventory. 

 

At the top of the list is the actual value of the inventory of a business as that value becomes the key component in margining for an inventory term loan or part of a business line of credit. Factors assessed here are the potential resale value and the initial cost.

 

Business owners and financial managers should understand that inventory financing is about asset turnover. ie the inventory turnover ratio. This is a critical measurement in lender financing consideration - how quickly a business can turn inventories into accounts receivable and then cash!

 

The collateral required around an inventory loan as a stand-alone loan or part of a line of credit is the inventory itself - so the value and quality and marketability of the inventory are key.

 

Businesses should be prepared to present proper financial statements and properly aged listings of inventories and accounts receivable - allowing the bank or commercial finance firm to best assess financial health and repayment.

 

WHAT ARE THE TYPES OF INVENTORY A BUSINESS COULD USE AS COLLATERAL

 

The types of inventory reviewed by the inventory financing lender, in the majority of businesses, can be broken down into 3 categories

 

Raw Materials

Work In Progress

Finished Goods

 

Finished goods are the most liquid of these 3 categories and will always command the higher borrowing power unless the product is highly specialized/unique.

 

However, in many cases, raw materials can command significant borrowing power based on potential resale value.

 

Each of these 3 different inventory segments will usually have a specific loan to value attached to it - That is simply the amount the business lender will lend against that portion of the inventory - As an example, if a lender assigns a 50% loan to value on raw materials can borrow 50k on 100k of raw material inventory.

 

Understanding the different types of inventory on the balance sheet allows a business to secure better financing to support ongoing operations and business needs/business growth.

 

KEY TAKEAWAYS INVENTORY FINANCING  - THE MARGIN FORMULA IN INVENTORY FINANCE

 

Margin formulas vary significantly based on several key factors. They include an analysis of which one of the three stages your inventory is in (raw materials, work in process, and finished goods).  Businesses that are able to demonstrate they have perpetual inventory systems in place stand a  much better chance of ' borrowing power ' when it comes to financing inventories as part of their overall ' current assets.

 

Your overall gross profit also plays a key point in financing. Ultimately important is the lender's/bank's opinion on how marketable your goods are under a worst-case ' forced sale ' scenario.

 

  

THE GOVERNMENT SMALL BUSINESS LOAN PROGRAM DOES NOT FUND INVENTORY AND RECEIVABLES   

 

Many business owners consider the Canadian Small Business Loan Program to finance their business. They wrongly assume that the program covers some sort of working capital, cash and inventory components. That is not the case! In that program, only 3 classes of assets can be financed - equipment, leaseholds, and real estate. The program is a term loan versus a revolving credit facility typically required to finance inventories.

 

UPDATE! In 2022 the Government of Canada updated the SBL loan program to now include working capital financing and business credit lines that would allow inventory financing components and receivable financing as part of the program. The financing of inventory for startups is very challenging, and the federal loan guarantee program can help!

 

CREDIT FACILITIES THAT COMBINE INVENTORIES AND ACCOUNTS RECEIVABLE

 

How does the business owner use inventory financing to maximize sales and profits? Is there a winning way we constantly recommend and implement for clients looking for inventory finance? The answer is that most successful financing in this area is in the context of a combined credit facility that also financed receivables. Two sources of financing exist here - The Canadian Chartered bank and, in some cases even better: Non-bank asset-based lines of credit. 

 

  

 NON-BANK ASSET-BASED LENDERS ARE GREAT AT FINANCING INVENTORY   

 

While the bank or commercial non-bank lender places a higher emphasis on receivables due to their more immediate liquidity, they also fully realize those sales are generated from inventory turnover.  While banks differ in Canada on inventory margins, it is non-unusual in ' ABL ' (asset-based credit revolving line solutions) to achieve anywhere from 30 - 75% borrowing power. Your  Inventory management system and asset turnover are the keys to asset-based loans of this type. Having a good management system in place is key, such as FIFO / LIFO-based programs

 

Oh, we almost forgot. Why can't used submarines be financed? We would say that they can't be readily liquidated, and valuation is extremely hard to determine. Although we suppose the financing company lender could utilize a ' FLOATING DEBENTURE '!

 

CONCLUSION - THE IMPORTANCE OF INVENTORY FINANCE SOLUTIONS

 

Managing inventory is a key part of business asset management - the inability to properly finance inventory can lead to lower working capital availability and prohibit proper purchasing of inventory needs.

 

Solutions available to  businesses looking for inventory financing include

 

Supplier financing

P O Financing

Inventory Term Loans

Asset-based loans/lines of credit

 

Effective financial and inventory management will enhance cash flow and provide a key solution to the business financing challenge.

 

 

"The biggest challenge in business is not the competition but making sure you have enough capital to execute on your vision." - Jason Calacanis

 

If you want to beat the challenge of inventory finance in Canada, call 7 Park Avenue Financial,  a trusted, credible and experienced Canadian business financing advisor with a track record, allowing you to achieve the business loan funding you require. Whether it's an unsecured loan or asset based financing solution, talk to the experts about an inventory line facility or short term loan solution.

 

 FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK  /MORE INFORMATION 

 

What are the advantages of inventory financing?

 

 

There are numerous advantages and benefits to inventory financing facilities via an inventory financing loan  - key benefits around inventory finance companies who offer different types of inventory financing include the ability to improve the overall cash flow position of the company. Companies with positive cash flows and better asset turnover can improve buying power and access better pricing from key suppliers and vendors who sometimes offer bulk discounts for larger purchase orders that accompany prompt payment.

 

Fast turnover in inventory helps accelerate sales revenues which can generate additional profits.

Proper use of inventory financing can fund all types of inventory, including raw materials,  inventory as work in progress, and finished goods.

When inventory financing is combined with other credit facilities, such as asset-based credit lines, a business can achieve lower costs of financing regarding interest rate, etc.

Business lenders view asset turnover as a key part of overall working capital management, enhancing the company's ability to access other forms of credit.

 

 

Click here for the business finance track record of 7 Park Avenue Financial