Stock / inventory financing

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What is stock finance?

Stock finance is a lending facility that enables businesses to release value from existing stock — while still retaining ownership of it. The cash that is realized can then be used to improve cash flow, or to finance a new short-term project.

Alternatively, with stock financing, some lenders can even purchase stock from a seller — on behalf of a buyer. This stock serves as collateral for the loan. Lenders are subsequently paid back when the buyer has sold the goods on to a customer.

Stock finance is especially useful for businesses in retail, wholesale, logistics and international trade — as it allows for seasonal stock requirements.

Stock finance is a form of secured lending or asset based lending. It is also known as inventory finance.

Stock finance — considerations

Stock financing allows a company to raise working capital against inventory it owns. This enables companies to deploy valuable sums of money — elsewhere in the business e.g. to pay upcoming expenses, acquire machinery or for general growth purposes.

As collateral for inventory financing — lenders can consider finished goods, raw material as well as work in progress. The amount of funding you can access, is fundamentally based on the value and type of stock you put up as collateral.

Funds can be advanced as a one-off loan, but are generally provided through a 30 to 120-day revolving credit facility — where you can draw down on the funds, up to a certain limit, as and when needed. Repayments are made when stock is sold — essentially resetting your credit limit. Accordingly, with this line of credit, you do not need to make a fresh application — every time you need financing.

As stock finance is a form of asset-based lending, interest rates and charges are often lower than what you would get with a company credit card — for example.

What separates stock finance from other trade finance solutions — is that funding is secured based on the physical stock you have in your warehouse. With trade finance, money is typically lent to you based on the confirmed orders your business has — with the same being true for purchase order finance. Consequently, stock finance is ideal if you hold buffer stock or buy in bulk to sell to individual consumers.

Stock financing solutions are sometimes provided together with invoice finance facilities. In this way, once stock is sold and invoiced, the invoice finance repays the stock finance.

How does stock finance work?

To get access to stock financing — you would need to look for an appropriate lender. Some lenders may not be able to offer the scale of funding your business requires — while others only work with companies in certain sectors. Further, interest rates and fees vary significantly — between inventory finance lenders.

Once you’ve found a suitable lender — they will need details on your business, its finances and credit history. You will also need to disclose why you need access to the funds.

Based on these details, lenders will be able to make informed decisions — as to your eligibility. As well as the value of your stock, cash flow will likely be the primary factor — that determines how much you can borrow and at what rate.

Lenders may offer you an inventory loan or an inventory line of credit. The loan is just based on the value of your stock and can only be used once, while the line of credit provides you with funds on an on-going — as needed basis.

Stock valuations may need to be carried out by independent third parties — before any agreement is finalized. Any funds advanced will only be for a portion or percentage of the full appraised value.

Terms and conditions will be set in the lending agreement, so it’s important you study this carefully — before agreeing to terms. Things to look out for specifically include any early repayment charges, credit facility opening fees and credit facility maintenance fees.

Should you agree to terms, some lenders may require weekly stock inventory reports — with the level of funding provided going up and down, as goods are sold and restocked.

Benefits of stock finance

  • Improves cash flow
  • Flexible repayment terms
  • Access to more funds — as your business scales
  • Can be used in conjunction with other funding solutions e.g. invoice financing
  • Can be used for almost any purpose

Limitations of stock finance

  • Stock is used as a form of collateral
  • Short-term lending facility
  • Expensive — Interest rates can be high
  • Extra fees and charges may apply — valuation fees, extra due diligence etc.

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