The Challenges and Solutions To
 Retail Inventory Financing

Retail inventory financing is one of the toughest types of debt financing your can attempt to secure.

Lenders are largely not interested in retail inventory financing for the following reasons:

• Prices can fluctuate quickly, destroying the lenders security position in the process.

•  Inventory items are highly movable and can disappear without a trace leaving the lender with no security and potentially no recourse if you fail to pay your debt obligations.

• Forced liquidation of seized inventory can result in only pennies on the dollar.

•  Seasonal products provide greater risk if the business is forced to carry them out of season.

• Inventory tracking and control systems do not always protect the amount and value of the inventory that is being held for security.

For most small businesses, most retail inventory financing is self financed by the owner.

This can be a frustrating realization to anyone opening a business or looking at purchasing a business.

Even for medium sized businesses, the inventory financing percentage offered by most conventional lenders will range from 0% of the inventory value to a high of 30%.

Lenders may tell you they can finance up to 50% of value of inventory. But if you read the fine print, its usually 50% of liquidation value which can equate to only 10% to 30% of what you actually paid for the inventory.

Here's some ways to deal with your retail inventory financing needs.

1. Minimize the percentage of low margin product you carry. Low margin product carries a very low liquidation and lending value. At the same time, easily accessible liquidation channels are also key to higher lending ratios.<br><br>

2. Invest in a good inventory tracking and control system. There are lenders that will provide larger amount of inventory financing if you have tight controls and accounting systems in place.

3. Focus on supplier credit and your in store inventory turns. The combination of low inventory, fast turns, and a reasonable amount of supplier credit can be a powerful retail inventory financing strategy.

4. Collect Deposits on larger customer orders. While not common, there are certain retail businesses that can take greater advantage of their supply chain and prepayments. The status quo opinion is that you need to have all the inventory in store to make sells. Its important to challenge and test this assumption to minimize inventory levels. In some cases, you may be pleasantly surprised with what you discover.

5. Look for just in time supply sources. Daily inventory management is more work, but if it keeps product on the shelves, it may be an effective strategy to consider.

6. Utilize any non asset specific working capital like certain term loans and unsecured lines of credit for inventory and secure other financing methods for equipment, leaseholds, and receivables.

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