You’ve got a great idea for a product, you’ve sourced a wholesaler, and you’re all ready to go… but you lack the finance to put in the order. What do you do? All startups face the problem of finding the initial investment that will let their project fly.
The difficulty is that your new business has no trading or credit history and most loan providers want to see that a company is profitable before lending it cash. It’s a Catch-22 situation.
One common way to get around this is bootstrapping: gathering all the savings and credit you have available to scrape together the money for your first order. Bootstrapping can work and has the advantage that you retain all control of the business without diluting your equity. But for many, it is not a complete solution; often, the costs associated with beginning a business exceed what partners are able to source through friends and family. But some lenders will look at startups, though track record is obviously an advantage.
What is startup inventory financing?
Inventory financing is a common way for product businesses to raise the capital they need to purchase or manufacture the goods they’ll later sell. The cash is supplied as a short-term loan or as a line of credit. In both cases, no collateral is required as the inventory itself is the collateral. Should something unforeseen inhibit your ability to repay,, the lender will repossess the inventory and sell it to repay their loan.
How does startup inventory financing work?
An inventory finance company rarely provides 100% of the cost of the goods you are buying. The lender has to take into account the value of the goods if the borrower defaults. In that case, the inventory is possessed and liquidated by the loan provider, which is unlikely to get full retail value. Consequently, lenders will often offer around 50-80% of the money you need, depending on the value of the goods you’re purchasing.
The problem for startups is that many inventory financing lenders require good business credit and a positive financial track record. By definition, a new startup has neither of these.
Sales over $150,000? Kickfurther can fund your inventory. Apply Now!
It may be better for a startup in its first few months of trading to look elsewhere for finance. There are peer-to-peer platforms that may be willing to lend to startups with innovative business plans. Also, angel investors are always looking for opportunities to put money into interesting startups with great ideas.
What are the pros and cons of inventory financing for startups?
- Businesses can avoid costly out-of-stock scenarios on their best product(s).
- Additional financing means that your working capital is unaffected by purchasing new inventory, and your business can run smoothly.
- With no collateral needed besides the inventory itself, you can be sure that your property and assets are safe if your startup fails.
- It’s generally easier to get than other forms of financing because the inventory acts as collateral.
- It’s always going to be difficult to obtain – you need to have a great idea if you’re going to secure inventory financing for your startup.
- You should also be aware that startup financing is rarely available if you wish to get your products manufactured.
- Sometimes the interest rates imposed by the lender can make inventory financing an expensive way to borrow money.
What is required to get a startup business loan?
Sometimes it can seem that the odds are stacked against startups, with lenders being unwilling to lend money to untried businesses. From their perspective, that is hardly surprising; why risk lending money to a company that can’t prove profitability ability to repay the loan?
To get a startup business loan, you’ll need an extremely detailed business plan that shows your research, where you plan to sell, why you plan to do things as you do, and so on. It should also detail your experience in your field to show credibility in leading a business there. Ideally, you have already worked in that industry and are now applying your expertise to your own startup; if not, does a co-founder, investor or advisor? You’ll likely also need an excellent personal credit score to illustrate your money management skills.
Many startup business loans are available locally, to help businesses in certain economies and communities flourish. If you find you have these options available to you, do your research into what they require from you to start your application.
What will a startup loan cost?
This entirely depends on the lender, the type of finance and the amount borrowed. When you’re comparing startup loans, don’t be tempted to simply take whatever is offered, especially if it’s even larger than you planned. Remember that you need to be able to afford the repayments comfortably to avoid endangering your startup’s success.
Can you get an SBA loan for a startup?
The most popular Small Business Administration loans are the 7(a) and 504. They offer low rates, long terms and large amounts but are not designed for startups. High credit scores, a good financial record, and longevity are all important if you are to secure one of these much sought after business loans.
The only SBA loans available for startups are their microloans. SBA microloans are available to startups and businesses owned by minorities, women, and veterans for amounts up to $50,000. This is a good option for those who fit into these demographics, but they are often offered by community-based organizations, which can mean you may or may not have one near you.
Which startups should consider inventory financing?
Any commerce business with a solid business plan that needs to buy products should consider inventory financing. In an ideal world (to make accessing funding and other resources easier for your business), you would fund your first sales out of your own pocket/fundraising to establish a viable product and market, then seek inventory financing when you have proof that customers are purchasing from you. If you can do this, you will be in a strong position when you apply for startup inventory financing, because you will have proof of concept.
What are the best options for startup business loans?
Young companies should investigate the many options listed here to help bolster their initial funding. They should find success here fairly accessible.
- Microloans from the SBA and other organizations – do your research for what is available to you and businesses in your area as there are often local grants, especially if you will be running a brick and mortar store.
- Friends and family – it’s not easy to ask, but it’s always worth it. If you do borrow from friends and family, put a contract in place and pay them back as you would any other lender. If you don’t, you can risk permanently damaging your relationships.
- Credit cards – getting those first sales is key, so sometimes using business credit cards or your personal credit cards is the best way to purchase that early inventory and advertising, as long you don’t endanger your own financial health.
- A personal loan is a common way for startups to get their funding. If you are still working for someone else and have a good credit score, then a personal loan will likely get you the best rates as you get your business off the ground.
- Crowdfunding and peer-to-peer lending
- Grants from government agencies or private foundations – it’s a good idea to spend some time exhausting these options, as every dollar counts in the early days of your business and these carry very favorable rates and terms.
- Inventory financing from lenders who will consider new businesses – since your inventory is collateral, you may find a lender that will take on this type of funding. For businesses that reach $150,000 in annual sales, Kickfurther can fund your entire cost of landed goods where you won’t make payments on the inventory until after sales begin.
How to Apply for a Startup Loan
Due to the age of your business, lenders will want to see every piece of evidence that your business can grow to profitability. To do that, prepare a comprehensive and realistic business plan that will show a loan provider that you are a bankable risk. Try to be as ready to start operating as you can to prove to them you are ready to put your plan into action. All startup loan applications will be different, but if you have the right plan, the right history, and accurate facts and figures, you give yourself the best opportunity to secure funding.
Getting the capital to begin a startup is rarely easy. But if you put in the effort, and you see a fit within the market for your idea, you will succeed, even if it requires some lateral thinking. The key thing is to ensure that you understand any finance that is offered.
Once you’ve crossed over $150,000 in annual sales, Kickfurther can help you fund inventory to meet demand without exhausting your cash on hand and help unlock volume-ordering discounts to improve your profit margin.