Getting a loan, under the right circumstances, is a significant step for anyone. Now that most industries are being disrupted by the current global pandemic, it’s important to equip ourselves with enough knowledge about financing options that we may apply for in case of an emergency expense. And when it comes to businesses, it’s no different.
Traditionally, businesses can apply for government-provided loans such as SBA 7(a) loans and 504 loans, express loans, as well as microloans for underserved markets. In the past couple of months, the government has also issued debt relief and paycheck protection programs for businesses that are heavily affected by COVID-19. Knowing why you need the money and understanding how much you can afford are both essential when facing financial hardship. The last thing you want is to get into more trouble financially, right? The good news is that businesses that have an extensive inventory can apply for another type of loan called warehouse financing.
What are the benefits of warehouse financing?
While it’s true that there are a lot of other options in the market when it comes to borrowing money, it all boils down to what you need. Here are some of the benefits of warehouse financing:
- Allows businesses to leverage existing inventory – Lenders that offer warehouse inventory financing require borrowers to use their inventory as collateral in the event that they become unable to repay their loan. However, this could also be seen as an advantage as the more valuable your inventory is, the bigger loan you might be qualified to apply for.
- Easier to get as opposed to other types of loans – As mentioned above, warehouse financing may be a bit easier to acquire compared to other loans because of the collateral involved.
- You don’t have to use all items in your inventory as collateral – Businesses are not required to use their entire inventory as collateral. As part of the lender’s due diligence process, a third-party representative may have to appraise your inventory to determine its value and identify the items stored as well as other relevant equipment that can be used as collateral.
Are there any disadvantages to warehouse financing?
One of the biggest disadvantages of warehouse inventory financing is that the lender can take over your collateral inventory and sell these items as a way to cover the loan. However, this will only happen if you become unable to fulfill your monthly payments.
Another thing to consider when applying for warehouse loans is that this type of loan usually involves a lot of money. Keep in mind that your prospective financial institution would be paying a third-party organization to perform an audit of your inventory, review your accounting process, as well as appraise the content of your collateral inventory. The costs for these types of services usually depend on the size of your warehouse as well as the number of items in your inventory. On top of that, your lender would also have to monitor your inventory on a regular basis for transparency purposes.
How does warehouse financing work?
Warehouse loans work by using your inventory as leverage to get the financing you need. If you’re a business that needs a quick cash injection, warehouse financing is an option that you can consider. Here are some steps to take note of when applying for warehouse financing:
- Like most loans, you will have to apply for a loan with the agreement that you’ll repay what you owe over a fixed period and with interest.
- Before getting approved, the lender will perform a review of your accounting system as well as an audit of the items in your inventory and other relevant equipment.
- After getting your loan approved, lenders will provide you with the funds that you can use to pay for business expenses or to purchase additional inventory.
- Depending on your loan terms, expect the lender to monitor your inventory regularly.
Additionally, don’t be surprised by the amount of involvement that a third-party organization may play in the terms of your loan as most of these functions should be performed by a neutral entity.
What types of warehouse financing options are available?
If you’re unsure about applying for warehouse financing, you also have the option to consider alternative funding sources. Check out other financing options below to find out more:
- CMBS Loans – CMBS loans, or commercial mortgage-backed securities, is a type of secured loan backed by mortgages on commercial properties rather than real estate. The collateral involved to secure this type of loan usually involves properties such as warehouses, retail stores, and offices.
- SBA loans – The U.S. Small Business Administration (SBA) works with lenders to provide loans to small businesses. The SBA does not lend money directly to small businesses but rather provides the guidelines for loans made by partner lenders, community development organizations, and other lending institutions. With SBA loans, warehouse-based business owners can avail of the SBA 7(a) and 504 loans which borrowers can use for pretty much a variety of business expenses. Keep in mind that the SBA is a governmental agency that might involve stricter rules and regulations.
How do you apply for warehouse financing?
Applying for warehouse financing involves a couple of processes from the borrower’s end and will vary in terms of business type and the inventory involved. Here’s a quick breakdown of the steps to follow when applying for warehouse loans:
- Take a look at your financial standing – Do not be surprised when your lender asks you to provide your balance sheet, tax returns, bank statements, and other relevant financial documents.
- Determine your assets – Identifying your assets is the most important part of the process as it will influence your business’ value when applying for a loan. Lenders may take a look at your inventory list as well as machinery and equipment to determine whether these items may be used as collateral.
- Submit your application with all the relevant supporting documents – The tedious part of the process is completing your application and submitting all the relevant documents. No lender is the same so make sure to check with them directly about the requirements you would need to submit.
- Expect an audit – After completing your application, your lender may then perform their due diligence and audit your warehouse to make sure that everything is accurate.
- Wait for approval and funding – Once all the documentation is complete, you may be asked by your lender to complete some paperwork and then you’re good to go!
As with most financial decisions, it’s important for you and your business to justify the need for a loan. Loans are tricky things to navigate and could be detrimental to your business’ financial standing if you become unable to finance your monthly payments.
Closing Thoughts: Is Warehouse Financing Your Only Option?
What if we told you that you have another financing option to consider that’s easier to apply for with higher limits and lower rates? Seems impossible? Well, meet Kickfurther.
Kickfurther is an online inventory funding platform that provides companies funds that they usually cannot access through traditional sources. Kickfurther applies a unique twist to the crowdfunding phenomenon for businesses that want to raise money to purchase additional inventory.
Individuals looking to earn money can choose which company to help and how much money to offer. The business will then offer a specific rate of return and a specific time frame to the buyers. The end goal is for businesses to outline their expected sales periods for customized payment terms. After the end of each sales period, businesses are then required to submit sales reports and provide the payment for every individual for each inventory sold.
While there definitely is no guarantee that the additional inventory will be sold, this creative and innovative funding model is a great way for businesses to acquire fast funding to be able to meet market demand. With Kickfurther, businesses could expect no bureaucratic procedures and no more stockouts.