Posted in Finance, Accounting and Economics Terms, Total Reads: 450
Definition: Inventory Financing
Inventory Financing is form of asset based lending to obtain a line of credit with inventory as the collateral. It is useful for businesses that have a shorter credit period towards its suppliers than the time taken to sell the inventory to its customers. It helps in solving the problem of unseasonal cash flows and also allows businesses to purchase or keep additional inventory in order to achieve higher sales volume during peak seasons.
The interest rate in the case of inventory financing is higher when compared to other forms of financing like accounts receivable financing because it is considered to be a type of unsecured loan. If the company is unable to sell the inventory then the bank may also not be able to sell it.
Inventory financing is generally used by small and medium sized retailers and wholesalers. Following are the benefits of inventory financing
• Helps in borrowing inventory and in order to keep the shelves stocked
• Alternative mode of financing for companies with inadequate cash flows- those businesses that cannot get working capital credit from banks
• Helps during times of uncertain cash flows- helps to repay suppliers and maintain adequate stock during low sales period
For e.g. Mr. A is a car dealer and he purchases cars from car manufacturer and sells it to customers. The inventory here is the car, which is expensive and Mr. A needs financing to buy the cars. So he goes for inventory financing from a financial institution and once he sells the cars he can repay the loan and get another line of credit to purchase more cars to sell it to customers.