Some of the biggest challenges that manufacturers face is managing their working capital and inventory through periods of growth or decline. As a manufacturer you are often required to keep large amounts of inventory on hand in order to be able to meet the demands of your customers. Financing this inventory can be a major balancing act while making sure you have the right inventory, and the right amount of inventory at any given time.
Here are three ways manufacturers finance their inventory.
Asset Based Loans
Asset Based Loans are generally available for companies that are doing greater than $1,000,000 in annual sales. A finance company will lend money against existing accounts receivable and inventory on hand. Typically there is a formula that the lender will stick to. For example, a lender may offer to finance up to 80% of your accounts receivable and 50% of your inventory at cost or liquidation value.
Asset Based Loans are a great option if you don’t currently have any other financing, and are looking for more substantial funding that will grow with you over time. Set up can take 5-15 business days and the costs of funds will be 10-18% per year.
Credit Cards
We all have them, but as business owners we don’t always use them in the most efficient manner. Using credit cards can be a great way to fund new inventory, as long as it is done wisely. Just because we have credit, doesn’t mean that we should use it. While not all suppliers take credit cards, there are also opportunities to take out cash advances on certain cards. These cash advances often come with additional charges, so make sure to do your research beforehand.
If you are considering utilizing a credit card to fund your business follow these three pointers.
- Make sure your purchases are crucial to your business. Don’t waste your credit.
- Calculate your credit card fees and interest into your cost of goods sold if you are funding inventory. This way you know your true costs of manufacturing your products and can price accordingly.
- Choose a card that has a good points system. While the points only hold a value of 1-1.5%, they do add up over time.
Supplier Credit Facilities
Supplier Credit Facilities are probably one of the least well known financing programs for inventory. Under a Supplier Credit Facility, a finance company will provide you with open terms to purchase goods when your suppliers will not.
They work like this. The lender offering the supplier credit facility will purchase materials for you, under your direction, and simultaneously sell them to you on open terms. You then pay back the lender on the predetermined date. Typically 30-90 days after the date of purchase.
Supplier credit facilities are one of the few financing programs that will help you finance new inventory versus lenders that want to finance existing inventory on hand.
There are a lot of creative ways to finance inventory, especially as a startup. As your business grows, and you build your credit it will be easier to get terms from your suppliers. In the beginning, the most important thing you can do when financing your inventory with a credit card is understanding the costs. If your financing costs don’t make sense when factored into your cost of goods sold, then you should seek an alternative.
As an entrepreneur and business owner, it is important to remember that what you buy is just as important as what you sell. Don’t overstock inventory and don’t be too opportunistic, especially in the early stages when you are relying on credit.
When you have questions about financing inventory it’s important to seek out a professional that can help walk you through the various options. Star Funding has been providing working capital to manufactures for almost 20 years. We are always happy to discuss the creative ways that we can help you grow your business. Please email alevine@starfunding.com for more information.
