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What would happen if your best-sellers are available for purchase, but you lack funds to replenish them? With the help of inventory financing, eCommerce businesses can meet demand and keep their inventory full; however, going with the wrong financing solution may harm their cash flow.
While a traditional term loan might allow for a predictable payment schedule, inventory financing is more closely linked to purchasing goods. Knowing the specifics of each option allows an eCommerce business to choose the best solution without bringing on additional financial stress.
Begin With Your Inventory Cycle
The decision to finance inventory has to start somewhere: with the inventory cycle. For instance, one store may need cash fairly frequently, perhaps several times a year, because it sells fast-moving consumer products. In contrast, a store that sells seasonal goods or products with a high price tag will require more time to sell off its inventory.
Reassess all the processes in the inventory cycle: how stock is acquired, how much time it takes to sell the products, the terms of payment of suppliers, which profit margins are achieved on sales, how goods are returned, and how long cash stays blocked in different product lines before customers make their payments.
Consider a Traditional Term Loan
Traditional term loans provide a certain sum of money to be repaid in installments. The financing scheme is convenient for many e-commerce enterprises that already have established practices of cash generation.
Businesses may need a traditional term loan for various purposes rather than only for purchasing stock and repaying the loan.The funds could support a combination of stock purchases, marketing, equipment, technology, or expansion costs.
Comprehend Inventory Financing
Inventory financing makes the relationship between borrowing and inventory more practical. Instead of having a lump sum amount that can be used anywhere, a business owner can get a credit line that is designed mainly to buy and store inventory.
The financing can help a lot when inventory demand changes. A growing business can borrow money to prepare for an upcoming busy season and then pay back the borrowed money when inventory demand decreases.
Look Past the Interest Rate
The best interest rate does not imply that the financing option is the cheapest option to go for. The overall cost of borrowing will definitely change depending on fee obligations, repayment frequency, collateral needed for the financing, and origination costs.
The business should find out the total amount of financing cost and compare it with the benefit gained from the inventory. With the knowledge of total cost, the business will also have an easier time comparing the term loan with the inventory finance.
Consider the Predictability of Cash Flows
Predictable cash flows usually make fixed repayment schedules much easier. Businesses that have stable monthly sales would be glad to know how much they have to repay and when.
For unpredictable businesses, it is better to seek a financing option that fits to a full extent with constantly changing needs for inventory. Seasonal merchants, for example, will need much more capital during the quieter months.
Assessing Collateral and Individual Risks
Various lending options may demand the collateralization of properties, stock or personal guarantees. Hence, it’s best for entrepreneurs to be completely knowledgeable on the collateral involved before accepting funds.
Collateral can make it easier to obtain better financing terms, but it also imposes consequences if the loan repayments cannot be made. It makes sense to assess the collateral requirements and weigh them against how beneficial it is to invest in an inventory.
Consider the Seasonality
Seasonal online stores have a special hurdle to overcome as they need to stock up before the demand comes. It results in excess cash being trapped for weeks and sometimes months before sales get going.
A financial product that is suitable for regular sale periods won’t necessarily work during holiday rush or promotional season. Therefore, it is essential to study past sales and assess future needs before settling on the amount of money needed.
Refrain From Taking More Loans Than Necessary
The ability to borrow may entice one to expand their business, however, taking out loans that one cannot use incurs expenses nonetheless. Instead of impulsively viewing their borrowing limits as the maximum amount of loan available, companies must better determine their actual need to borrow money for their inventory.
It entails estimating the expected purchases, lending a bit of leeway, and analyzing how fast the inventory can be sold. Enjoying access to smaller loans enhanced by the timing may sometimes be more helpful than taking a large sum simply because it is accessible.
Compare the Two Structures Side by Side
The traditional loan and inventory financing options can both play an important role in the business but address different challenges. For instance, the traditional loan is appropriate for those businesses that need a certain amount of financing with a predetermined repayment period, whereas the inventory financing is more beneficial when a company requires funding that derives from the purchases of stock.
The selection of the proper option is contingent on the nature of the business, so first of all, the business should analyze the following issues:
Purpose: General expansion of the business or purchase of inventory
Repayment: Fixed payments or repayment that is based on the state of the inventory
Cash flow: Stable cash flow or variable revenue sources
It is important to estimate flexibility, fees, collateral requirements, and consequences of lack of sales.
Find the Appropriate Structure for the Business
The best inventory financing option is the one that is suited to how an online business operates, purchases, sells, and collects money. Term-loans may provide reliability that comes with scheduled payments, while inventory-financing options will connect borrowing to stock.
A thorough assessment of inventory turnover, cash flow, seasonality, costs of financing, fit, and risks can be the key to making a successful business fail. Instead of picking a financing option based on available cash or advertised price alone, e-commerce businesses should choose a financing structure that allows sustainable growth and enables working capital to flow.
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