Suppose there is a car dealership that expects an increase in demand for cars next season. To meet this demand, he decided to increase his inventory. To do this, he has to buy more cars from the supplier, which will require a huge amount of capital. You may be able to finance the stock directly through a line of credit from your creditor that will have the extra bonus without interest and more flexibility when trading advantageous terms. If this is not an option, you can track financing through a lender or bank. Therefore, inventory financing can be a useful option for businesses that include longer cash conversion cycles or seasonal demand or merchandise trade. But it is important that they carefully choose their lender after reviewing all repayment terms. And companies should try to shorten their cash conversion cycle to avoid over-reliance on short-term loans. Inventory represents an important part of the company`s current assets, as it represents assets held in the short term to meet expected needs.
But if the number of claims days is high, the company`s capital can be frozen, and it will not have enough funds to buy more inventory. During the application process, a lender will look at your personal credit history and corporate finances, but there will also be due diligence. Due diligence examines your inventory management system, the value of your inventory, the rate of losses or losses, profit margins and inventory sales. You may need to ask a third party to evaluate and verify your storage facilities, accounting and inventory management systems, and the new inventory. Lenders may require you to repeat this inspection process every three to six months, which can result in the cost of maintaining the line of credit. We`ve heard of lenders even making surprise visits to inspect your warehouses and inventory. In addition, inventory of any kind tends to depreciate in value over time. The business owner seeking inventory financing may not be able to receive the full advance inventory fee.