Inventory Loans

Financing Inventory Assets(About Author..By Stan Prokop)

Inventory loans or the financing of your inventory as a component of working capital are critical to the success of your business if your firm has a strong inventory component in working capital.
Inventory is one of the two components of working capital - the other is of course receivables. More often than not the receivable asset is typically larger, on a monthly basis than the inventory assets - but some firms based on the nature of what they do have a very heavy investment in inventory.
Inventory converts into receivable which convert into cash. We all know that. The crux of the matter though is the time in which this happens. Your ability as a manufacturer, wholesaler, etc to purchase inventory, re work it, bill your customer, and then, wait for your account receivable to get paid in many cases can take 2-3 month. The financial analysts call this whole process the cash conversion cycle - the only way you can slow that cycle down and improve cash flow is, unfortunately, to delay payments to suppliers as long as you can. That's not a desirable operating strategy.
Inventory financing and inventory loans work best when they are often within the context of a true asset based lending arrangement for a combination of inventory and receivables. However the bottom line is as we have stated - financing in this critical area of business financing is available, it's specialized, but when properly put in place can significantly grow sales and profits.
So is there a solution. There is of course, and in Canada it is a highly specialized solution involving the financing of inventory as a key driver to improve your cash flow and working capital. If done properly you do not incur extra term debt - the reality is that all you are doing is 'monetizing 'inventory to generate additional cash flow and working capital for your growth and profits.
One or two critical challenges continually obstruct our client's ability to properly monetize their working capital. Let's examine some of those challenges and determine how they can be overcome.
The first challenge is simply that it is becoming increasingly difficult to obtain inventory financing from traditional sources such as the Canadian chartered banks. In fairness to our friends at the banks it simply is difficult for them to properly value and monitor and understand each company's different inventory financing needs and the cash cycle around that inventory that we have discussed. One further technical issue arises here, which is simply that if your firm has an operating lender in place that lender has probably, sometimes unknowing to yourself, taken a security on the inventory as a part of their security agreement. That's not optimal, your inventory is collateralized, but you don't receive any funding or margining against it.
We meet with many clients who are in this position, and need to work with them to unravel their current financing to properly allow for the monetization of their inventory via an inventory loan or margining facility.
Inventory financing in Canada is specialized - as we've noted. We strongly recommend you seek and work with a trusted, credible, and experienced advisor in this area.What are the benefits of such a relationship. First of all your inventory will be properly 'understood 'and valued, allowing you to borrow against its value accordingly. It is an unwritten but generally acceptable rule that most banks lend approximately 40% against inventory assets. Two points here - if you can get bank financing on inventory and get that 40% advance we would pretty well recommend you take it; however if that becomes insurmountable, as it does for most clients, you actually can get anywhere from 40-75% from a true inventory financier.
Are there any special requirements to get proper inventory financing? In general no - a standard business financing application applies, and you must be able to demonstrate, preferable via a perpetual inventory system, that you can account for and report on your inventory on hand, usually on a monthly, but perhaps on a weekly basis.