Cash flow problems threaten any business, especially during periods of high expenditure or reduced revenue. The key is finding a solution that gives you the financial injection you need when you need it.
If you hold an inventory of stock in store, waiting to sell it on to customers, the chances are that you are sitting on a source of funding that you could utilise and send your business to the next level.
This is known as stock – or sometimes inventory – finance. It’s a way to raise finance against the supplies owned by your business.
Our guide explores how stock finance works and whether it’s a suitable solution for your business.
- How stock finance works
- Who is eligible for stock finance?
- The advantages
- Considerations to make
- How to secure stock finance for your business
How stock finance works
Ahead of a stock finance arrangement, the lender will determine what percentage of the net value of your stock is eligible for financing. A third-party stock valuation will be required for this.
The amount offered will vary from business to business. Several factors will influence the loan, including the amount of finished goods, work in progress or raw material in stock, how sellable the goods are, seasonality, how fast moving the stock is, and where they are stored.
Once the stock finance facility is agreed upon, you will provide the lender with your monthly or weekly stock listing. The lender then updates the funding based on any stock movement.
Stock finance comprises various forms of finance, including:
- A short-term loan
- A credit line offering continual funding
- A merchant cash advance, in which the lender is repaid through a percentage of future sales
It is often (though not always) combined with an invoice finance facility. When your stock is delivered to the customer and an invoice is sent, you will use the funding from your invoice finance to repay the stock facility.
The nature of stock finance means that fulfils many purposes, including offering consistent capital for your business based on your inventory. It is ideal for seasonal ventures that need to unlock cash flow in off-peak periods, alongside those who need a cash flow boost.
Who is eligible for stock finance?
Stock finance isn’t suitable for everyone. Most crucially, you need to be a product-based business with inventory to utilise as security against the loans. Examples include retailers, manufacturers and suppliers.
Sometimes, you will need to have a significant value tied up in stock. Some lenders will only consider lending to businesses that hold inventory worth six-figure sums or more to make the time spent underwriting the loan worthwhile.
You will need a trading history behind you. Potential lenders want to see that you have been trading for at least a year before considering this. The longer you’ve been in business, the better the terms that should be available. You will also need a solid credit history, including a good business credit score.
Finally, stock financing may not be for you if you need capital urgently. Depending on your lender, credit history, and needs, the underwriting process may take weeks or even months to finalise. Financing from an online lender will be a little faster but more expensive.
If you are looking for a faster solution, short-term loans, trade finance, or invoice finance might be worth considering.
The advantages
There are several benefits associated with stock finance. We’ve listed some of the most prominent below.
It boosts cash flow
The primary purpose of stock finance is to unlock capital tied up in your inventory. It is, therefore, a great way to boost cash flow, which is integral to the financial health of any business. The funding released can be used for anything, including fuelling growth or covering expenses.
It’s confidential
Stock finance is an entirely confidential form of external finance. When using it, you do not need to disclose to customers or stakeholders that you are working with a lender. This prevents any concerns about your financial stability and maintains your control.
It fuels your operating cycle
Stock finance propels your operating cycle, freeing cash flow to keep your operations moving smoothly while giving you access to the supplies you need for maximum productivity. You will also be required to hold significant stock, which will help you to meet ongoing demand.
It offers capital in off-peak periods
In periods of low sales, you may have slower moving stock lines in your warehouse. Stock finance allows you to release funds from this inventory, which could be crucial to your survival when revenue is down. For this reason, it is ideal for companies facing seasonal fluctuations.
It is used for stock overseas
Stock finance is compatible with inventory held overseas. Importers and exporters are eligible, allowing you to continue to trade and seize opportunities in global marketplaces.
Several types of stock can be utilised
Many types of stock may be used as security against stock finance. As long as your goods are not in excluded sectors, you will be eligible for funding.
It supports stock management
When utilising a stock finance facility, you must regularly update the lender with any stock movement. Doing so also forces you to keep tabs on your stock and understand how it adapts over time. Over time, you will establish patterns that improve your supply management processes. In some instances, the stock can be held at the lender’s facilities.
Considerations to make
Stock finance only works if it meets your objectives and unique needs. We have listed some considerations to determine if it fits your business.
It is expensive
There are costs associated with stock finance. The most prominent is the expense of the initial valuation, alongside the ongoing cost of updated valuations through the facility timeframe. This makes it a more expensive form of funding than some alternatives.
It’s not accessible to everyone
Some lenders require you to have stock of a significant value before they offer funding. You will be ineligible for funding if you don’t have substantial inventory. You will also need to showcase documentation highlighting your credit history, previous performance, balance sheet, etc. If you don’t have this, or it doesn’t reflect your business positively, it might make it hard for you to access finance.
Stock may be seized
If you fail to keep up with repayments, the lender has the right to seize your stock to clear the owed amount. In this rare scenario, your productivity could be compromised, and your financial situation could worsen.
It complicates growth
As your company grows, your inventory will fluctuate as you sell more or buy more supplies to meet demand. The fluctuation will cause your funding to adjust, which may be hard to track. As stock changes, you will also need to keep your lender updated through your growth mission.
How to secure stock finance for your business
Stock finance is a valuable tool for maintaining cash flow, the lifeblood of your business. It is essential to keep your business running smoothly, minimising disruption and fuelling growth.
Stock finance provides an alternative means of financing your business if you are not getting any joy from more traditional funding sources while utilising your inventory as security to boost your funding eligibility.
There are many stock finance providers on the market, including banks and traditional lenders and agile, online-based alternatives.
If you decide that a stock finance facility will benefit your business, Pegasus will put you in touch with an appropriate lender for your needs. We will also guide you through the application process to maximise your chances of success.