Inventory Financing and Working Capital Loan Solutions In Canada | 7 Park Avenue Financial

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Inventory Financing In Canada: Solving The Working Capital & Cash Flow Challenge Around Business Inventories
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inventory financing + working capital loan solutions


 Inventory Financing Working Capitals Loan Solutions



Canadian business owners and financial managers focus on the term ‘inventory loan' when addressing this balance sheet component for additional working capital and cash flow.


While it is possible to get an inventory loan to finance and purchase inventory, the reality is that, more often than not, inventory financing is a critical component of additional working capital facilities or a business line of credit or non-bank asset-based loan in conjunction with receivable financing.


The Significance of the Cash Conversion Cycle  & Asset Turnover In Inventory Loans


Let’s examine some key aspects and types of inventory financing for the business owner and determine how to access this and how the inventory financing loan solution is often used as additional funding for business expenses.


For starters, when you are successful in financing inventory, you are in essence freeing up the cash that is tied up in that critical part of your balance sheet.


When we talk to clients about working capital and cash flow financing in general, the term ‘cash conversion cycle’ is one on which we place critical importance. It may sound like a textbook finance definition, but the reality is that it’s simply the formula for determining how one dollar of capital flows through your business. And that dollar of capital usually in fact comes from the initial purchase of inventory. This is in turn, converted into accounts receivable, which are (hopefully!) collected and turned into cash. The time that dollar stays on your inventory line is a key part of the cash conversion cycle.

The Importance of Inventory in the Balance Sheet


It would help if you focused on inventory financing when in fact, your investment in this balance sheet category is significant, often only rivalled by accounts receivable. We have worked with many firms that have to carry more inventory than A/R. That becomes a financing challenge.


The Challenge of Traditional Inventory Financing


Naturally, traditional financing institutions such as chartered banks don’t place a lot of reliance on their lending or their ability to secure and dispose of this type of asset.


The reality is that your inventory might be in the form of raw materials, work in process, or finished goods. Depending on the lender's knowledge of inventory, the ability to margin or finance that inventory becomes limited. In order to get a bank loan to secure inventory financing firms must demonstrate clean balance sheets, profitability, and cash flow. These facilities from banks are often accompanied by accounts receivable financing facilities for firms with good business credit history.


Small firms not qualifying for conventional/traditional bank loan financing often consider a merchant cash advance to generate cash for inventory, as well as other purposes.

Optimal Inventory Financing


Inventory financing on its own tends to be challenging – it is not impossible in some circumstances. The reality is though, that inventory financing works best when it is tied to a full working capital or asset-based financing facility that covers the inventory itself, your receivables, and in some cases, supplemental assets such as equipment or real estate.

Key Considerations for Financing Inventory


As a cautionary note, we must add that for your inventory to be financed, you should be able to demonstrate that it ‘turns' and that there is only a small percentage of obsolescence attached to this asset category.


You can quickly determine how fast inventory turns by going to your income statement, taking your ‘cost of sales' line, and dividing it by ‘inventory on hand'. So, what is a good turnover number? The answer is that it depends on overall industry benchmarks for your type of business. A grocery store might turn over its inventory many times more often than a manufacturing company with a complex build process.

Importance of Efficient Inventory Management


We should also add that inventory becomes more financeable when you are running a perpetual inventory system and you can demonstrate you have a solid handle on what is on hand and provide reporting in that regard.


Key Takeaways


  1. Inventory Financing: At its essence, inventory financing is a loan or line of credit that business owners get using their inventory as collateral. The main aim is to provide working capital to businesses to continue their operations smoothly, even if funds are tied up in inventory.

  2. Cash Conversion Cycle: This is how capital flows through a business. It begins with the purchase of inventory, which is then sold, turned into accounts receivable, and eventually collected and converted back into cash. The quicker this cycle moves, the better it is for the business's cash flow. Inventory financing aims to optimize this cycle by providing funds when cash is tied up in inventory.

  3. Traditional Financing Challenges: Traditional financial institutions, such as banks, often see inventory financing as riskier compared to other forms of lending often requiring personal assets and personal guarantees.  This is because the inventory value can fluctuate, and in the event of a default, selling off merchandise might not recover the total loan value. Understanding this challenge is crucial to knowing why alternative inventory financing solutions are sought.

  4. Working Capital & Asset-Based Financing: Beyond just existing inventory financing, a holistic solution often ties in the inventory, receivables, and other assets like equipment or real estate. This combined approach can often offer better terms and greater flexibility for businesses.




Speak to 7 Park Avenue Financial,  a trusted, credible, and experienced financing advisor in this very specialized area of business financing for SME's and small businesses – that will allow you to determine if your inventory is properly financed and, if not, what financing options are available. Working capital loans and business financing that make sense for your business needs.





What are the 4 components of inventory?

Inventory can be broadly categorized into four primary components based on the stages of production and the purpose they serve:

  1. Raw Materials: These are the essential components or ingredients companies purchase to produce finished goods. Raw materials are not yet processed and are used in the manufacturing process. For instance, a furniture manufacturer might purchase timber as a raw material to produce wooden chairs.

  2. Work-in-Progress (WIP): These are goods that are in the process of being manufactured but are not yet complete. They represent a middle stage in production, between raw materials and finished goods. For the furniture manufacturer, chairs that have been assembled but not yet stained or varnished would be considered work-in-progress.

  3. Finished Goods: These are completed products that are ready for sale. They have undergone the entire manufacturing process, from raw materials to final product, and are waiting to be sold to the end customer. Using the previous example, a fully assembled, stained, and varnished chair ready for sale would be a finished good.

  4. MRO (Maintenance, Repair, and Operations) Inventory: These items aren't directly used in production but are essential for the production process. They support operations and help maintain the production equipment and facilities. Examples include lubricants, tools, spare parts, gloves, etc.


Why is the ‘cash conversion cycle’ mentioned to be of critical importance?

The 'cash conversion cycle' is critical because it is the formula for determining how one dollar of capital flows through a business. It starts from the initial purchase of inventory, which then gets converted into accounts receivable and eventually collected and turned into cash. The time this dollar stays within the inventory is a pivotal part of the cycle.

How do traditional financing institutions typically view inventory financing?

Traditional financing institutions, such as chartered banks, often don't rely much on their lending or their ability to secure and dispose of inventory as an asset versus non bank inventory financing lenders.

Their capacity to finance the inventory often becomes limited, depending on their knowledge and understanding of the nature and type of the inventory (raw materials, work in process, or finished goods).

What are the conditions that make inventory more financeable?

When business owners ask how inventory financing works it is important to realize that for inventory to be more financeable, a business should be able to demonstrate that the inventory 'turns' or gets sold and replenished via purchasing inventory regularly. Moreover, only a minimal percentage of obsolescence should be attached to this asset category. Another factor that aids in financing inventory is if the business runs a perpetual inventory system and can show that they have a firm grasp of what is on hand and can provide regular reporting.

Who should businesses consult to determine if their inventory is properly financed?

Businesses should consult a trusted, credible, and experienced financing advisor, especially one specializing in this specific area of business financing. Such an advisor will help them ascertain whether their inventory is currently adequately financed and inform them about the available financing options if it's not.

What is the Just-in-Time inventory system, and what benefits does it offer to businesses?

The Just-in-Time (JIT) inventory system is a management strategy that aligns raw material orders from suppliers directly with production schedules, aiming to reduce inventory holding costs by receiving goods only when they are needed in the production process. The benefits of JIT include reduced storage costs, minimized waste due to perishable or obsolete stock, improved cash flow, and the potential for quicker response to market changes. However, it requires precise forecasting and is vulnerable to supply chain disruptions.

How does RFID technology enhance inventory management processes?

RFID (Radio-Frequency Identification) technology uses electromagnetic fields to automatically identify and track tags attached to objects. When integrated into inventory management, RFID offers real-time visibility into inventory levels, allowing for accurate tracking, reduced human errors, and streamlined warehouse operations. This leads to efficient stock replenishment, reduced shrinkage, and the ability to seamlessly manage inventory across multiple locations. It also provides insights into product movement and behaviour, helping businesses make more informed decisions about stock rotation and sales strategies.


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Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil