Inventory financing

What is inventory financing?

With inventory financing, a financing partner buys your inventory and pays you for it. The goods stay in your own warehouse, and you keep selling as usual. When the contract ends, you buy the inventory back.

That way, your cash isn't sitting on your shelves for months. You can use it to pay suppliers, restock, or get ready for a busy season.

You may also hear it called inventory finance or stock financing. It's the same thing.

How does inventory financing work?

1. The partner values your inventory. They look at what you have on hand and how quickly it sells.

2. The partner buys your inventory and pays you. You receive part of its value.

3. The inventory stays with you. You sell and ship as usual, and you replace what you sell with new goods.

4. You buy the inventory back. That happens when the contract ends.

During the contract, the partner owns the inventory. You keep managing it.

When does inventory financing make sense?

We see it most often in these situations:

• Your cash is tied up in both invoices and inventory. Factoring frees up the cash in your invoices. Inventory financing does the same for your inventory.

• You buy months in advance. For a season, for example, or because your goods come from far away.

• Your bank doesn't have a solution. Your inventory can still be a source of cash.

• You want to grow without running down your inventory. You keep enough goods on hand and still have the cash to keep going.

If you sell to other businesses, take a look at factoring, too. The two often go hand in hand.

An example

This example is hypothetical. A garden furniture wholesaler places its orders in the fall. The goods arrive over the winter and sit in the warehouse until spring. Only then do the garden centers order, and they pay on 60-day terms. Factoring helps once the invoices go out. Until then, though, the cash is stuck in inventory for months. With inventory financing, the wholesaler gets cash as early as winter. Factoring covers the rest once it starts invoicing.

What inventory qualifies?

Almost any inventory can qualify, as long as it sells well and you keep accurate track of it.

• Its value has to be stable. Goods whose price swings sharply because of outside factors are hard to finance.

• The goods have to sell readily. Anything that's been sitting in the warehouse for a long time is worth less to a partner.

• You have to track your inventory closely. The partner wants to be able to see what's in the warehouse and what's been sold.

Not sure about your inventory? We'll look at it together.

Inventory you still need to buy

If you have customer orders but not the cash to buy the goods, that can be financed, too. A partner pays your supplier up front. You deliver to your customer and pay the partner back later.

That way, you can take on a big order without draining your cash.

What should you know before you start?

Inventory financing isn't an ordinary loan. Here are the upsides and the things to watch out for.

The upsides

• Your inventory stays where it is. You work, sell, and ship as usual.

• Your cash is no longer tied up. You can use it for purchases, to pay suppliers, or to grow.

• You can combine it with factoring.

What to watch out for

• You temporarily don't own your inventory. The partner owns it until you buy it back.

• You don't get the full value. The partner finances part of it.

• Your inventory management has to be in order. The partner keeps track of your inventory.

• It costs money. Run the numbers beforehand to make sure your margin can absorb the cost.

• The partner decides. Applying doesn't guarantee you'll get financing.

How much does inventory financing cost?

You pay a fee for the period the partner finances your inventory. How much depends on your inventory, your business, and the amount.

We can't quote a fixed price here, because every case is different. That's why we put your file together first and then get pricing from the partners that fit. You'll know what it costs before you sign anything.

You'll find what Nextfactor charges for its advice in our terms of engagement.

How does Nextfactor go about it?

1. We look at your situation together. Where is your cash tied up: in invoices, in inventory, or both?

2. We find the partner that fits. Each partner works differently and looks at inventory differently.

3. We put your file together. A complete file improves your chances of approval.

4. The partner decides. The partner signs the contract with you.

We work with several partners for inventory financing.