Grow Business Inventory with Inventory Loans

After dealing with restrictions caused by the pandemic for nearly two years, many small businesses are struggling to stay ahead of cost increases, competitive pricing pressures, and inventory-depleting shortages. Now the Federal Reserve’s interest rate hikes have added higher borrowing costs to the list of challenges.

The good news is that there are now loan options available that small business owners can use to expand their current inventories, especially ahead of the important end-of-year holiday season.

Inventory loans are usually designed to be a short-term financing solution that allows firms to borrow money to purchase inventory. As your business sells the merchandise, it can use the proceeds to repay the loan. The main benefits to a small business owner of using an inventory loan is that it can help you keep up with customer demand by keeping your shelves stocked with items your customers want and need now.

Fifth Third Bank offers small businesses a number of credit solutions that can be used for inventory purchases, including unsecured lines of credit or term loans backed by the Small Business Administration. The Fifth Third Fast Capital^® program offers loan amounts from $10,000 to $100,000 in as little as one business day with no collateral and minimal documentation requirements.

How Does Inventory Financing Work?

Inventory loans are generally debt-based financing, which means lenders will loan you money with an agreement that you'll repay what you have borrowed over time with interest. When you receive an inventory loan, it is either as lump sum of money or a credit line that you can tap to purchase inventory. Most lenders typically won’t allow you to finance the entire cost of inventory, but you should be able to finance at least half if you're approved.

The inventory you buy typically acts as collateral for the loan, which means you don't have to offer any other business or personal assets to get financing. If the business defaults on the loan, the inventory could be used to cover the balance owed.

Because inventory loans are typical business loans, they sometimes come with higher interest rates than long-term borrowing. For this reason, it can be helpful to have a strong credit rating to qualify for the best available rates.

Another factor is the approval process. Just like any other loan, lenders will look at your business financials, including your credit score, revenues, and the time you’ve been in business. But lenders may also look at your inventory records, specifically to see how quickly your inventory tends to turn over.

Lenders want assurance that you'll be able to sell the inventory within a reasonable period to pay back the loan. They will also estimate the value of your inventory to see what it's worth compared with how much financing you're asking for. That’s because if you default on the loan, the lender will know before you close how much it can get for the unsold inventory.

Loan amounts usually range from $5,000 to $500,000. Repayment periods can cover three to 12 months. To qualify, your business must be established for at least six months to a year, with minimal annual revenue of $100,000.

The disclosure process may require you to provide the bank with a recent balance sheet, profit and loss and cash flow statements, inventory records, sales forecasts, business bank account statements, and tax returns. Expect to provide updated records if the review process continues for an extended period.

If you are looking to grow your business and need to have inventory on hand for big sales periods, such as the holiday season, an inventory loan can help you secure the necessary financing to have the right merchandise available to sell when the market requires it.

Find out more about Fifth Third Bank’s small business loans today.