The Pros And Cons Of Business Inventory Loans
One of the challenges that small businesses encounter and often struggle to overcome is inadequate inventory during peak seasons. Even if a firm’s sales volume is not seasonal, a shortage in stock levels can result in missed opportunities.
In such circumstances, a business can choose inventory loans as an escape route. This type of inventory financing allows a firm to purchase stock by collateralising it against a loan. However, before resorting to inventory loans, business owners must weigh its pros and cons to make an informed decision.
What Are The Pros Of Inventory Loans?
First, let’s focus on the bright side. Highlighted below are some advantages of inventory financing:
Improves Inventory Management And Sales
Enterprises, especially smaller businesses, often have insufficient inventory but do not possess enough funds to replenish it. Inadequate stock hinders sales, which then obstructs the cash flow required to purchase inventory, thus, snowballing into a full-fledged crisis. Here, inventory financing offers an easy way out. The funds can be employed to obtain a substantial inventory and prepare for peak seasons, which, in turn, improves business’ sales.
Allows Expansion Of Product Lines
Many businesses focus solely on their current product line, thereby missing out on several growth opportunities. When customers purchase a product, they often require a supplementary good or related item. For example, let’s say a business offers dietary supplements and protein powder. It can increase sales by adding products like protein bars, energy drinks, food, and workout supplements to its repertoire. And, an inventory business loan allows one to undertake this investment.
Supports Bulk Buying
Buying goods in bulk is imperative for businesses operating in the wholesale industry. However, placing a large order calls for substantial working capital. Loans acquired through inventory financing strengthens the financial standing of a wholesale business. This ensures that its warehouses and shelves are always fully stocked with products.
Facilitates Restocking Of Popular Products
What happens when a business runs out of a popular product and encounters a shortage of working capital? It loses substantial sales, which causes its clientele to turn to competitor firms instead. An inventory business loan allows a company to bypass being under-stocked to always fulfil customers’ needs.
Prepares a Business for Seasonal Fluctuations
Small businesses that experience seasonal fluctuation in sales can use an inventory business loan to buy products during the off-season. For instance, let’s say a company sells umbrellas and raincoats. It will inevitably witness a decline in sales during the summer and winter season. To prepare for these seasons, it can buy stock through an inventory loan. Additionally, businesses can employ the funds to handle the influx of sales during holiday seasons.
Eliminates Cost Cutting
Perhaps the most significant benefit of inventory financing is that one can avoid exhausting their profits to replenish stock. It extends up-front financing required to purchase products while the business operates as usual.
What Are The Cons Of Inventory Financing?
Inventory loans aren’t without certain downsides.
Discussed below are some of their disadvantages:
Short-term Funding
An inventory business loan is generally paid off over a short period, contrary to a typical term loan. In fact, the term of inventory loans tends to coincide with an inventory’s lifespan. This implies that the loan balance is to be repaid within a short period and through larger monthly payments.
Restricted Use Of Funds
Inventory loans come with clear restrictions on how the funds can be used. As a result, this inventory financing can be inflexible compared to other forms of financing, like a line of credit. For instance, an inventory loan does not allow a borrower to use funds for paying taxes or payroll. However, if he/she wishes to buy business inventory, then there are no restrictions on the use of funds.
Less Suitable For Large-scale Businesses
Inventory financing can provide substantial funding to small or medium-sized companies. However, it fails to meet the financial requirements of a fairly large business. Moreover, bigger market players with sizable assets and an unfailing track record can easily secure large amounts of funds otherwise. As a result, they steer clear of availing funds through an inventory loan.
Bottom Line
It is challenging for any business to secure stable financing for its working capital requirements. So, when opting for any source of business loan, one must discern its nitty-gritty and assess its ups and downs. It is only after they weigh potential opportunities and obstacles that businesspersons should reach a decision and apply for a loan. In that context, it’s also imperative to determine a suitable lender to enjoy optimum benefits. Businesses can resort to platforms like MANDII to that end. Businesses can browse through inventory financing options from various lenders, and select an offer accordingly.
