Running out of merchandise is one of the worst things that can happen, especially during the shopping frenzy of Black Friday or before the holiday season.
However, there are worse case scenarios such as not being able to purchase new merchandise because of cash flow problems. To avoid this dreadful situation, you might want to turn to e-commerce inventory financing.
Here are 6 basic things you should know about this type of financing.
1. Inventory Financing Is Different from Personal Loans
One common mistake many business owners make when they first set foot on the road to entrepreneurship is not being able to compartmentalize. One thing is your business and another one is your personal life.
The same goes for your finances. Taking money from your life savings to support your business is a dangerous and often bad decision. If your business fails, you end up losing both your source of income and the money that was meant to help you live your retirement dream or keep your kids in college. Similarly, using your company's money for your personal needs is risky and can even lead to criminal charges.
For these reasons, there are personal loans and business loans and each one should be taken separately depending on the circumstances. Inventory financing is a type of business loan. As its name suggests, this financing aims to help businesses cover their inventory needs. Inventory financing is available through different loan types and each loan's requirements and terms depend on the lender. In some cases, lenders ask for collateral for the loan and the inventory itself can be used for this purpose.
2. Traditional Types of Inventory Financing
There are two main types of inventory financing that are usually offered by banks, namely WIP financing and PO financing. Work-in-process (WIP) financing refers to funding you get for the manufacturing process. This usually involves paying sub-suppliers for the components they provide. This type of financing is suitable for companies that sell complex products whose manufacturing requires multiple supplies and takes a long time. A potential problem with WIP financing is that depending on the length of the manufacturing process, you risk not being able to start selling your products before you have to start repaying the financing.
PO financing refers to purchase orders. To get this type of financing, you first need to receive a purchase order. Based on this order proof, the lender will provide you with the necessary funds to fulfill the order. This is a good solution for sellers who have large purchase orders and partner with big retailers. An advantage of PO financing is that you are typically only required to pay it back after the company that issued the purchase order pays the invoice. However, since this type of financing requires a PO, it's unlikely to be able to get one as a direct-to-consumer e-commerce company.
3. Alternative Inventory Financing Solutions
If WIP or PO financing isn't a solution you can qualify for, there are different other ways to get financing for your inventory. Getting a business loan is one of them. There are dozens of loan providers who are ready to finance even borrowers who have less than a year in business.
Vendor financing is another great option for new businesses. This solution allows you to purchase inventory and pay for it within 30 to 60 days. This option is also a sound choice for building a good business credit profile.
Short-term inventory loans are another possible choice. These loans can be paid in as little as 6 months or a year and help you cover your necessary inventory without overwhelming your finances.
Another alternative is getting a business line of credit. This type of loan works like a debit card. You have a fixed amount of money you can use for different business needs such as refilling your stock. After you repay the loan, you can access the line of credit again and you don't pay interest for the credit you don't use.
4. The Eligibility Criteria for e-Commerce Inventory Financing Varies
If you haven't been in business for a long time or you have a less than perfect credit score, you might rush to think that you can't qualify for inventory financing. It is true that many lenders do consider companies' credit history and the time they spent in business when they approve inventory financing applications.
However, this is not always the case. Some companies do not use a credit check to evaluate applicants. Many lenders simply want to check your account to understand your company's financial situation and they also assess your sales performance. If you manage to pass these 2 exams, you can qualify for inventory financing and get the necessary funds even as soon as the following day.
5. Choose the Right Products if You Apply for Inventory Financing
As an e-commerce seller, you can enjoy a great deal of flexibility when it comes to choosing the products you want to sell. You can choose a specific niche or try your luck with different products from distinct industries. However, there is one golden rule you should follow if you decide to apply for financing to be able to manage your inventory – choose in-demand products that are bound to sell.
You can check out what successful sellers offer for inspiration or rely on your past experience. Choosing to launch new products no one else is selling might be a daring and good idea, but at the same time, it's risky. If the products won't sell, you won't gain returns and you will be stuck with a debt you must pay. Inventory financing is a great solution to ensure you've got the necessary stock, but it is not money you get for free. Depending on the lender you choose, there will be different contractual clauses you have to respect while repaying the loan.
6. Choose the Best Lender for Your Needs
If you start looking for e-Commerce inventory financing options, you will see there are plenty of lenders to choose from such as banks and private lenders. There are also multiple marketplaces where you can access different types of business loans and compare the offers and eligibility criteria of different lenders. To make sure you choose a suitable lender, it's recommended to compare several options before choosing one. Look at the terms, interest rates, service fees, and any other fees your loan can incur, approval times, and customer reviews.
Conclusion
There are different solutions you can opt for if you want financing for your inventory. Remember that each loan has its specific eligibility requirements and repayment terms. To make sure you choose the type of funding you can afford, you should first compare different options.
