In the midst of the global pandemic, businesses – even those with the strongest cash flow – face varying levels of uncertainty brought about by current economic conditions. As a business owner, the type of financing assistance you apply for will have a lasting effect on the future of your company. It’s important to equip yourself with the necessary knowledge about the different capital options available to you and other creative ways to address your business’ cash flow shortage.

If your business deals with the distribution of a large number of goods or the sale of goods or services directly to the end-user, then you clicked the right article. Let’s talk about wholesale and retail financing for businesses.

What is wholesale finance?

Wholesale financing is the practice of using a company’s assets as leverage to be able to borrow additional capital for a wholesale business. This type of asset-based lending addresses recurring cash flow concerns as well as provides a business with enough cash on hand to fund an expansion project, hire extra personnel to meet seasonal demand, or accelerate marketing. Wholesale financing can also be used to improve a wholesale business’ purchasing power when buying large amounts of goods and materials for resale. Like most business loans, note that you may have to pledge an asset as collateral in order to secure financing.

From agriculture to the garments industry, wholesale financing is a great funding option for a wide range of industries. Whether you are trying to acquire more funding for a new warehouse or a new product line, wholesale financing can help you cover sizable purchases without hurting your business’ regular cash flow.

What are wholesale loans? Is it different from wholesale financing?

Financial jargon, from the outside looking in, can be confusing to say the least. In business, wholesale financing, wholesale lending, and wholesale loans all refer to loan products available to wholesale companies for various types of expenses. Regardless of the type of products you sell, having access to additional capital is important for any growing business with quickly evolving needs. Having enough working capital gives a company the much needed financial flexibility to meet short-term or long-term business goals.

What are the pros and cons of wholesale finance?

To determine if wholesale financing is right for your business, it’s important for business owners to equip themselves with enough knowledge about the different benefits and drawbacks of this type of financing. Let’s discuss the pros and cons of wholesale financing.

Pros

• If your business consistently posts strong sales, wholesale financing may be faster and easier to obtain compared to other conventional loans.
• Wholesale financing helps increase a business’ cash flow – enabling it to better manage operational expenses and other cash flow needs.
• Wholesale financing enables businesses to purchase mass amounts of inventory and take advantage of bulk purchasing at a lower cost.
• The borrower can decide when and how to use additional cash acquired from wholesale financing.
• Borrowers may take out a term loan or a line of credit depending on their business’ current financial needs.

Cons

• Wholesale financing may be difficult to qualify for depending on the current state of your financials.
• Borrowers should be wary of hidden fees and other charges.

Why consider a wholesale business loan?

As a business owner, growing your operations and increasing your bottom line are some of your most important yearly goals. As the saying goes, you need to spend money to make money. A wholesale business loan enables wholesalers to purchase a significant amount of goods for resale. This cash injection gives businesses an opportunity to take advantage of buying in bulk – allowing them to save money as opposed to buying in smaller quantities. A wholesale business loan can also provide a financial cushion for businesses to restock inventory, expand product lines, and support other operational expenses.

How do I apply for a wholesale loan?

When it comes to loans, requirements and qualifications depend on your prospective lender. Most traditional lenders often require a plethora of documents for review while non-traditional lenders such as online lenders have more flexible qualifications. Typically, the process looks like this:

• A business submits an application and provides the necessary documents required by the lender.
• The application goes through a review process where lenders analyze the documents provided. Lenders may also require further documentation to supplement the loan application.
• After the review process, lenders would usually require a borrower to commit to an agreement before proceeding to perform due diligence. This lessens the risk for lenders when appraising the collateral pledged by the borrower.
• If everything looks good after the due diligence process, funds will be provided as soon as possible.
• As for paying back your loan, repayment terms depend on the type of asset-based financing you applied for. For instance, if you chose a term loan, you would have to pay back the money you borrowed, including interest, over a set period of time. On the other hand, if you opted for a business line of credit, you only have to pay for the amount you borrowed and the agreed-upon interest that comes with it.

Disclaimer: This is by no means a comprehensive step-by-step list of a wholesale loan application as the application process depends on the type of lender and the type of loan you are applying for.

What is retail finance?

As the name implies, a retail business loan is a product offered by a financial institution geared toward retail businesses. Retail financing can be used to maintain, manage, or expand a retail business. From covering emergency expenses to taking advantage of the bulk pricing of goods, a retail business loan can be used for a variety of purposes. It can also provide financial support that businesses need to grow and expand.

What are retail loans? Is it different from retail finance?

Retail financing is a catch-all term used to describe loans specifically designed to meet the financial requirements of retail businesses. A retail loan can be secured or unsecured. Secured business loans involve a borrower putting up collateral which the lender may seize in case the borrower defaults on the loan. Unsecured retail business loans, on the other hand, are not backed by collateral. However, since unsecured loans do not require collateral backing, borrowers may encounter higher interest rates and a shorter payment period.

What makes retail financing great is that it can be used by retailers for a plethora of purposes. This type of financing option can be used by businesses to restock inventory, hire more employees to meet seasonal demand, invest in marketing efforts, upgrade machinery and equipment, or finance unforeseen expenses.

What are the pros and cons of retail financing?

Here are some of the pros and cons of retail financing:

Pros

• Can be used to pay for a wide range of business expenses
• Strengthens a retail business’ cash flow
• Competitive interest rates
• There are a variety of lenders that offer retail financing for small businesses

Cons

• May require collateral
• May be difficult to qualify for if you are a new business

Why consider a retail business loan?

A business’ working capital may become erratic due to the general nature of the retail industry. Here are some of the most common reasons why retailers consider a retail business loan:

• Purchase inventory – Without sufficient inventory, how will a retailer meet customer demand? Retail business loans can help cover costs for purchasing additional inventory, especially in peak shopping seasons.
• Manage cash flow – A retail business loan helps promote good cash flow management. This ensures that your business has enough outgoing cash to pay for business expenses.
• Invest in new technology – Investing in technology that will add value to your business is always a good idea. Technology can play a key role in boosting a business’ productivity and automate certain tasks to reduce labor-intensive work.
• Hire seasonal help – A retail store business loan should be able to cover seasonal business expenses such as hiring seasonal help to ensure that your store is operating seamlessly during busy seasons.

How do I apply for a retail business loan?

Unfortunately, there is no single best method when applying for a retail business loan. Your loan application will heavily depend on the type of loan you are trying to acquire, what industry you’re in, and the type of asset(s) you are willing to put up as collateral. Generally, expect your lender to take a look at your credit history, debt-to-income ratio, cash flow, bank statements, as well as other relevant financial documents that would support your loan application.

Wholesale Loan vs. Retail Loan: What Is the Difference?

With so many different lenders and loan programs available in the financial market, it’s difficult to keep track of which type of loan may apply to you. When it comes to wholesale and retail loans, the biggest difference lies in accessibility. Wholesale loans are provided to third-party correspondent lenders such as banks and credit unions while retail loans are developed by a financial institution and can be provided directly to the borrower.

Are there alternative financing options for wholesale and retail financing?

What if we told you that you have another option for your funding needs? Retailers, wholesalers, and anyone starting a business dealing with large amounts of inventory would benefit from exploring the many benefits of KickFurther. Kickfurther applies a unique twist to the crowdfunding phenomenon for wholesalers and retailers that want to raise money to purchase additional inventory.

Kickfurther helps you grow with inventory fundraising from your supporters and fans. When you sell your inventory successfully, you pay your buyers, not the bank. Simple, right? If you want to know more about Kickfurther, visit their website at www.kickfurther.com.

Conclusion

At the end of the day, you – as the business owner – will be the best person to determine what type of loan makes the most sense for your business. While it’s true that there are plenty of financing opportunities to choose from, the most important thing is to know what your business needs as well as the differences between the various loan products that you can qualify for. In doing so, not only will you be able to choose the best financing for your business but you will also save money in the long run.

In running a growing business, one of the most common issues businesses can face is inconsistent or poor cash flow. Simply put, cash flow is the amount of cash (or cash equivalent) transferring in and out of a business during a time period. There is a difference between cash flow challenges and recurring negative balance, which often indicates a more substantial business issue.

Cash flow challenges can be caused by seasonality, when your business or products sell heavily during one season, or, for many CPG companies, can occur when making inventory purchases that can leave bank accounts thinner until cash from new inventory is realized. To avoid this cash pinch when ordering inventory, many companies simply shrink their order size. Yes, this does avoid the cash flow pinch, but what does it do to a company’s growth when they know they could sell more than they’re ordering?

Understanding that this dilemma strikes at the ability of young companies to grow, there are steps companies in high-growth mode can take to seize growth opportunities without abandoning financial health. For CPG brands whose largest cost is inventory,  inventory financing can resolve the cash flow dilemma without sacrificing either growth or company finances.

What is inventory financing?

Inventory financing is a relatively straightforward funding option tailored to product businesses to acquire inventory for later sale. The funded products serve as collateral against the funding.  This model often allows smaller or younger companies to access larger financing available to enterprise clients by traditional lenders and is a strong option for quickly growing companies with increasingly larger and more frequent manufacturing runs.

How does inventory financing work?

Inventory financing can come in the form of a short-term loan or a line of credit that businesses can use to purchase inventory.  Lenders will often consider the type of inventory and sales data to establish  specifics of the loan.

Who can use inventory financing?

Inventory financing is a popular option for  retail stores, wholesalers, distributors, and manufacturing companies. To secure an inventory loan, a business must often meet the following criteria:

• Must be at least one year in business or meet a revenue threshold
• Must be a product-based business with a reliable inventory management system
• Must be able to provide detailed and accurate financial statements
• Must be able to certify that the business is profitable
• Must be able to provide credit history and scores

What are the documents required for inventory financing?

After gauging whether inventory financing would be an option for your business, the next logical step is to prepare  the documents required to apply.. Keep in mind that requirements may vary from one provider to another.

• Business plan
• Personal and business credit history and scores
• Personal and business tax returns
• Relevant personal and business financial documents (balance sheet, profit and loss statement, sales forecast, cash flow statements, among others)
• Inventory list and estimated value
• The appraised value of the inventory

How to prepare for an inventory loan?

Applying for an inventory loan can be simpler and quicker as opposed to other types of traditional loans. However, that does not mean it’s easier to acquire. If you think that inventory financing is right for your business, here is a step-by-step guide to help you prepare for an inventory financing loan application.

Step 1: Compile relevant financial documents

When reviewing a loan application, financial institutions need an overview of your business operations to decide for themselves whether or not you will be able to pay back a loan. Some of the standard financial documents you would need to bring are personal and business bank statements, tax returns, credit history and scores, and a list reporting the estimated value of your inventory.

Step 2: Prove efficient inventory management

It should come as no surprise that you should have a well-organized inventory management system in place when applying for an inventory business loan. Proper inventory management will make it easier for your lender to have an overview of your inventory. It will also give your lender an idea about your inventory’s turnover rate, how much profit you are expecting, and the products you are unable to sell.

Step 3: Establish your credibility

Inventory financing typically requires a more thorough due diligence process compared to other business loans as lenders need to make sure that your inventory is a valuable asset. During the assessment period, a third-party will be tasked to appraise your inventory and audit your inventory management system. The initial costs of this process vary based on the products in your inventory and the size of your facility.

Step 4: Review loan offers and wait for final approval

Once your application is complete, the lender(s) will provide you with a loan offer specifying  the loan’s amount, interest rates, and payment terms. After reviewing and signing an offer, you then wait on confirmation from the  lender.

What are the benefits of inventory financing?

As with any important business decision, a business owner should be able to carefully weigh the potential benefits and drawbacks of inventory financing. Let’s take a look at some of the advantages of inventory financing.

• Resolves a business’ cash flow challenges
• Increases potential for a higher profit
• Expands product lines
• Get ahead of potential inventory issues

What are the drawbacks of inventory financing?

Like other types of financing, inventory financing has drawbacks too. Here are some of the disadvantages of inventory financing.

• Potentially more setup costs because of a more thorough due diligence process
• Can be difficult to qualify for
• Higher loan minimums

What are the costs associated with inventory financing?

Like other forms of funding, inventory loans also come with fees. Remember, these are some fees you’ll find and not all lenders feature each or any of these fees.

• Appraisal fees – Also known as an inspection fee, an appraisal fee is a payment for an independent appraiser that is tasked to assess the value of your inventory.
• Prepayment penalty – A prepayment penalty is a fee charged by a financial institution if you pay your loan early.
• Origination fees – An upfront fee charged by a lender to process a loan application.
• Late fees – A charge that borrowers pay when they fail to make a payment on time.

Is inventory financing right for my business?

As the business owner, you know best. If any of the cash flow challenges or seasonality mentioned above affect your business, inventory funding may be a worthwhile exploration. It is important to understand that due to the nature of inventory loans in the event that you become unable to pay your loan, your inventory may be seized by your lender.

What inventory type makes good collateral?

There’s no single best inventory type that makes better collateral than others. Ultimately it’s the lender that will establish the value of your inventory to determine the loan amount based on the appraised value of your inventory.

Which lenders offer inventory financing?

As a small business, there are a variety of loans to choose from when it comes to financing. Whether you need an inventory financing loan or some other form of business loan, there are a number of tools available to help you get the funding you need. If you sell a physical product with sales over $150,000, Kickfurther may be able to combine the best aspects of inventory financing with many of the flexibilities and benefits that modern, alternative financing offers.?

Brands use Kickfurther to fund $20,000 – $1,000,000 in inventory on a custom payment timeline based on expected sales cycles. With Kickfurther, you can unlock volume-ordering discounts that help cover funding costs and can prevent stockouts from costing your business sales.

Properly managing your inventory is crucial to ensure customer success and stable profitability. After all, inventory is the most essential part of any product-oriented business. As part of a company’s current assets, products in your inventory can also be used as collateral whenever your business needs a quick injection of cash. If your business posts strong sales but you keep having difficulty securing enough capital to meet your growth needs, then an inventory financing loan might be the most reasonable funding option for you. But what exactly is inventory financing?

What is inventory financing?

An inventory financing loan enables businesses to purchase inventory and keep shelves stocked. Often, a small business that applies for an inventory financing loan needs a short-term or medium-term cash flow solution to ensure they meet consumer demand and capitalize on growth opportunities.

Inventory funding is flexible and uses the inventory you purchased as collateral in case you become unable to repay your loan. For example, a car dealership may apply for inventory financing to purchase more cars to sell. In the event that the dealership defaults on its loan, the lender is protected by the collateral and can seize the purchased cars to recoup loan losses.

What are the different types of inventory financing?

Historically, business owners could choose between two types of inventory financing: an inventory loan and an inventory line of credit. While both types of inventory financing options use a business’ inventory as collateral, they can be used in different ways.

What is an inventory loan?

Inventory loans are short-term loans businesses can use to purchase needed inventory (due to stockouts or  adding a new distribution partner, for example). An inventory loan is provided in the form of an up-front payment that business owners later pay back based on the conditions provided by the lender — much like many types of common loans. This type of inventory financing loan is well suited for product-based small businesses.

What are the pros and cons of an inventory loan?

Here are some of the advantages and disadvantages of an inventory loan.

Pros of an inventory loan

• Comes in the form of a lump sum
• Paid back in monthly installments
• Interest rates are often fixed
• Funding arrives quickly once you have been approved

Cons of an inventory loan

• The process for acquiring inventory financing can be expensive
• May carry higher interest rates compared to other forms of small business funding
• Often a higher minimum loan amount (can be a con for some and a pro for other businesses struggling to find higher funding)
• Review and approval can take several weeks to allow proper due diligence
• Purchased inventory is used as collateral

Does an inventory loan make sense for your business?

Businesses that are growing and experiencing an increase in demand should consider an inventory loan as an accessible financing solution to their funding needs. As businesses grow, their inventory orders become larger and they develop new costs; inventory funding can help ensure a business is able to both order sufficient inventory to meet trajectory and invest across other areas as needed with growth. As mentioned above, inventory loans may not be the lowest-cost financing option due to how banks price risks on these loans,but they may feature higher funding limits that help produce inventory at levels other loans cannot Unless  your product features very thin margins, an inventory loan, even if it has slightly higher costs, may be the fastest route to profitably increasing revenue, especially with an in-demand product or highly seasonal sales cycles. One thing to remember is that an inventory loan is a one-time lump sum payment and if you need another loan, you would have to go through the application process again.

What is an inventory line of credit?

An inventory line of credit is another form of short-term loan often used by businesses to buy the inventory they need when they need it. Like other lines of credit, businesses can access the credit line and only pay interest on the amount borrowed and not the total amount available.

What are the pros and cons of an inventory line of credit?

Here are some of the advantages and disadvantages of an inventory line of credit.

Pros of an inventory line of credit

• You only pay interest on the total amount borrowed, not the total amount available
• Predictable monthly costs
• More flexible compared to an inventory loan
• Can be accessed repeatedly as long as you pay back the amount you borrow
• Once everything has been finalized, funding can be accessed as soon as possible

Cons of an inventory line of credit

• Late fees may prove to be costly, as with most financing
• Purchased inventory is used as collateral
• Like an inventory lump sum loan, a line of credit’s due diligence process may be expensive and may take a long time

Does an inventory line of credit make sense for your business?

An inventory line of credit allows you to stock up on inventory in anticipation of busy seasons, or to purchase more inventory than cash on hand allows, or frees up your existing capital to spend elsewhere on the business. What sets an inventory line of credit apart from an inventory loan is that you can access your line of credit, repay what you borrowed, and then access again as needed. This type of inventory financing is perfect for businesses that need a reliable source of capital for their cash flow needs.

How can I apply for an inventory financing loan?

In order to secure an inventory loan, a business must often meet the following criteria, though keep in mind that all lenders differ and these represent some known criteria:

• Must be at least one year in business or meet a revenue threshold
• Must be a product-based business with a reliable inventory management system
• Must be able to provide detailed and accurate financial statements
• Must be able to illustrate the business is profitable
• Must be able to provide credit history and scores

What is the difference between an inventory loan and an inventory line of credit?

The main difference between an inventory loan and an inventory line of credit is their accessibility after initial distribution from a lender. An inventory line of credit can be accessed again and again as long as you are paying back the amount you have borrowed. However, an inventory loan is a type of term loan with a one-time payment.

Alternatives to inventory financing

There’s another form of inventory funding that borrows from the strengths of an inventory loan while improving overall terms, adding customized payment timelines, lowered costs and a streamlined application. Kickfurther inventory funding features no up-front costs, no application fees and no initial inventory inspection. Kickfurther funds your inventory purchase and you pay back later as inventory begins to sell — not immediately as with other loan types. You can fund $20,000 – $5,000,000 in inventory in just days at costs beginning around 1% monthly and 30% lower than competing products.

Key Takeaway

Be sure to review multiple funding options. Some options may appear inexpensive in the short term but carry higher fees later or feature lower overall funding. Other options can provide the fastest funding, but that comes at a cost. Compare the scenarios and review how each fits the cash flow you expect as you don’t want to be saddled with high payments before revenue from new product arrives, for example. For experienced assistance comparing or stacking multiple funding options, contact Kickfurther today for help understanding all your options.