How To Finance Inventory In Canada
Little Known Factors That Affect Inventory Finance Costs & Solutions
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Inventory finance lenders in Canada provide the solution to ongoing working capital challenges encountered by Canadian business owners and their financial managers. Inventory is often a key component in the current asset part of many balance sheets, particularly those in industries such as manufacturing. There are some critical factors in an inventory financing loan that need to be understood. Let's dig in!
Inventory financing is, of course, the collateralizing of your inventory for cash flow purposes. It gets tricky because it has to work for yourself and the lender and gets a little tricky if you have existing financing in place as part of your overall business strategy.
Most working capital solutions revolve around inventory and receivables - if your sales are growing and you have business accounts receivable and are turning your inventory, you are a candidate for more working capital - especially as these two asset categories grow!
The key to facilitating a solid inventory financing or purchase order financing in Canada is to help your lender get the feeling they will never have to realize on that inventory to collect their loan or financing proceeds! You want to be able to demonstrate that your inventory is marketable and that you have the ability to control and count the inventory. A perpetual inventory accounting system helps a lot in that process, so investigate that with your accountant.
In some cases, a purchase order financing solution or an A/R financing facility might complement the inventory financing loan. This is especially true for firms that take on much larger contracts or clients/orders.
When clients ask us what can go wrong in an inventory financing scenario, we often state that you must be in a position to be able to turn inventory over and demonstrate your products are marketable in a worst-case scenario.
We mentioned earlier about the challenge of managing through an inventory financing facility based on your current borrowing arrangements. In a perfect world (we know it’s not a perfect world!), you secure both inventory and A/R financing via a chartered bank. The alternative to this is an asset-based lending facility, or what is known as an ABL line of credit. This facility margins inventory and receivables to the maximum value, which greatly increases your ability to draw down on cash flow needs.
You will usually have a larger drawdown on receivable in a working capital or asset-based line of credit situation. Still, a proper inventory financing scenario can easily secure 60-80% of your overall inventory values, and that is a lot of additional cash flow if you need to draw down on it.
BENEFITS OF A PROPERLY STRUCTURED INVENTORY FINANCING LOAN
A properly structured inventory financing facility's key benefits are that it supplements your overall working capital needs. The facility should revolve, and you should only be paying for what you use. It would help if you also had defined borrowing limits on inventory and the ability to repay or draw more financing at your option.
Your best inventory financing ability will ultimately come from your ability, as we said, for you to demonstrate proper accounting and reporting of inventory, as well as information on customer prospects, contracts, etc.
Pricing on inventory and purchase order financing varies with the facility's size, the lender's interpretation of the marketability of your product, and your ability to turnover inventory at equal to or better than industry standards based on your own business model. Focus on demonstrating clearly how inventory financing will grow your sales and profits. That’s a win-win situation for you and your inventory lender.
Speak to 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor with a track record of financing success who can assist you with your inventory finance needs.
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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