Inventory Finance Versus Traditional Bank Loans: Which is Better?

At some point, almost every business will need additional money. It could be to ride out cyclical ups and downs, to purchase materials and parts, to develop dealer and distributor programs, to pursue growth initiatives, to assure funding as soon as products ship, or to provide critical working capital for day-to-day expenses and operations.

The first thing most businesses think of is a traditional bank loan. Indeed, banks are the largest business lending institutions and can provide many products and services – including loans. Yet there are other alternatives. Inventory finance, in particular, may offer a smart business financing option.

Inventory finance, a form of asset-based lending, has stepped far beyond outdated reputations as old-fashioned or commodity financing. Generally provided as a short-term loan or a line of credit, the amount borrowed is determined by the value of a company’s inventory. Lenders will lend a portion of that value, and the inventory secures the loan or line of credit.

Inventory finance versus bank loans: Is one or the other better? As with most financial decisions, there are pros and cons of each of these financing options. Let’s review a summary.

Inventory finance: pros and cons

Pros

• No need for additional collateral, since the inventory secures the loan
• Easier qualification, as it is primarily based on inventory value, not credit factors
• Fast funding
• Ability to work with non-captive, non-bank lenders

Cons

• Financing amount limited to a designated percent of the inventory value
• Possible appraisal fee for professional inventory review
• Potentially higher interest rates

Traditional bank loans: pros and cons

Pros

• Lower interest rates
• Longer repayment terms

Cons

• More difficult qualification, requiring higher credit scores and longer time in business

• More complicated application process
• Lengthier funding time
• Requirement for specific collateral (beyond inventory)

The lending relationship

While many banks offer inventory financing, it’s also possible to work with a non-captive, non-bank lender. Often, these finance providers can work with more speed and agility, and be more responsive to a business’ needs. Without some of the added regulations governing banks – and traditional bank loans – they can often work with clients in a way banks can’t.

• Partners.
  A good non-bank lender that provides inventory finance will make the effort to review and study each client’s business model and goals. Experts on staff often maintain extensive knowledge and experience in their clients’ industries, adding to their ability to understand business objectives at a deep level.
• Flexibility.
  A non-bank lender has the flexibility to develop tailored programs – that can extend beyond inventory financing – to meet changing needs and drive sales. They will be able to advise when and how to incorporate inventory finance into plans for best results.
• One-stop shop. A strong independent inventory financing partner can handle all of a business’ financing needs, using inventory finance as one tool in a large toolbox of financing solutions. Working with one partner that fully understands the business, and that is invested in a long-time working relationship, can help generate long-term sales and growth.

The decision to turn to inventory financing or a traditional bank loan is individual to every business. Both offer pros and cons, and both offer solid options to drive revenue and pursue growth efforts.

As a strategic financing partner that develops advanced, customized solutions companies need to generate long-term growth and achieve sustainability goals, Mitsubishi HC Capital America incorporates inventory finance as a key financing program. If you would like to explore how inventory finance fits into your strategic plan, contact us.