Inventory is an accounting term used for goods or products available for sale and raw materials that are used to produce goods available for sale. It may also be referred to all goods, items, products, produce, stock and materials kept by business owners to make profit by selling them in their respective markets.
What is Inventory Financing?
Inventory Financing is an asset-backed loan facility that can be availed on the value of some or all of business’s inventory or stock. There is a percentage set by the lender or financial institution on which loan is granted, based on the business inventory’s value. The percentage set and the interest rate offered shall vary from bank to bank and depend on the volume of inventory. Inventory here serves as a type of collateral for the loan, making it a secured business loan. This type of financial facility is availed by entrepreneurs or businesses that own and manage large quantities of inventory. In some special cases, Inventory Financing is itself used to purchase inventory by retailers, traders, manufacturers or distributors.
Eligibility Criteria of Inventory Financing
- Minimum age of the borrower should be 18 years
- Minimum 1 year of business existence, operating from the same location
- Applicant should be Indian citizen with no credit default history
- Good credit score is an added advantage
- Minimum annual turnover, as decided by the lender
The following entities are eligible to avail Inventory Funding or Loan against inventory:
- Traders, Retailers, Manufacturers, Distributors, Suppliers, B2B buyers, etc.
Calculate Your Eligibility on – Business Loan Eligibility Calculator
Features of Inventory Financing
- An asset-backed loan that can be availed by submitting inventory as collateral
- Loan amount depends on the percentage of value of inventory set by the lender
- It is a loan against products that shall not be sold immediately by the owner
- It is a type of Revolving Line of Credit and Secured Business Loan, as inventory is to be submitted as a collateral
- Percentage and Interest Rate offered shall vary from lender to lender
- Turn-around time for stock or inventory conversion into cash is flexible
- Helps in cash flow enhancement and improved liquidity with keeping stock asset intact
- The percentage range for loan amount against inventory is generally between 50%-90% of its value
- Type of short-term credit and repayment of loan is linked with the life of inventory
- Preferred by smaller privately-owned businesses, SMEs, retailers and wholesalers
Types of Inventory Financing
Inventory Loan: It is simply a loan based on the value of the business inventory, wherein loan amount can be availed and used at once from the lender
Inventory Line of Credit: It is basically a credit limit sanctioned by the lender in which the borrower can withdraw cash, as many times depending upon the requirement but not beyond the total sanctioned limit. The interest rate shall be charged only on the availed amount from the total sanctioned limit.
Note: In both the scenarios, the loan amount may depend on the inventory’s value and shall be sanctioned by the lender, based on the set
Documents Required for Inventory Financing
- Filled application form
- Passport-sized Photographs
- KYC documents of partners, co-applicants or promoters
- Business PAN card along with GST and Sales Tax registration
- Last 1 years’ bank statement
- Last 1 years’ balance sheet and audited P&L account statement
- Last 1 years’ ITR and Sales tax returns, if applicable
- Company registration certificate
- Documents with details of inventory as collateral, with invoices
- Income proof with financials
- Business address proof
Factors a Bank Will Consider
- Business, Economic and Industry Inventory sequences
- Inventory’s Resale Value
- Logistical and Shipping limitations
- Stock’s life and perishability
- Theft and Loss provisions, and much more
Points to Remember
- a) Few private and public sector banks and NBFCs hesitate to offer Inventory Finance, as they don’t want the load of collecting and keeping the collateral that is not useful for them, in case of any default from the borrower.
- b) Any kind of inventory tends to depreciate with coarse of time. Therefore, the borrower may not be able to get a full loan against the 100% value of its inventory.
How to Apply for Inventory Finance?
Just like business loans, working capital loans and term loans; inventory finance can also be availed by checking, comparing and picking loan deals from available lenders offering this type of loan. Financial institutions like private and public sector banks and NBFCs can be contacted to avail inventory finance.
Applicants can also visit paisabazaar.com to check and compare all the leading banks and NBFCs offering inventory finance. After filling in the basic required details on paisabazaar’s website, a respective relationship manager or customer care professional from the bank or NBFC will contact the applicant in the specified timeline to explain the deal and further process with loan formalities. To online apply for this loan, customers can also visit the official websites of financial institutions offering Inventory Finance.