The tighter your inventory controls, the easier it is to stay competitive, make sales, and scale up. However, having accurate forecasting measures in place isn’t enough if you don’t have the funds to pay for stock inventory. That’s why it’s so critical for business owners and executives to learn more about the variety of equipment inventory financing options on the market.
How Does Inventory Financing Work?
Inventory financing is a method of securing funds to immediately purchase goods that will be marketed and sold to your customers. A lending partner who offers equipment inventory financing treats the inventory purchased as collateral, meaning this is an asset-based lending vehicle. Equipment financing enables your business to avoid the dreaded problem of understocking without dipping deeply into cash reserves.
Why choose equipment inventory financing? There are many attractive benefits:
- The application, approval, and documentation process is efficient: it is accomplished once up front rather than every time you make an inventory purchase.
- Payback terms are usually customized to match your sales cycles.
- It provides a way to stay competitive and continue offering the best service possible to your customers.
However, equipment inventory financing does have a few caveats to note. Interest rates may be higher than with a different type of loan due to the short term. Plus, the loan must be paid in full when the inventory is sold to a customer, known as “Pay as Sold.” Finally, most conventional banks don’t offer equipment inventory financing, so it may take some extra time to find the right partner. However, these potential “cons” can be mitigated with proper budgeting, planning, and forecasting.
What Types of Equipment Inventory Financing Vehicles Are Available?
You can enter into one of two inventory financing options for equipment: floor plan or rental fleet.
Rental fleet financing is designed like a regular loan. The loan amount is set — often based on a minimum, such as $25,000 — and payments are structured to pay off the loan within about 24-60 months. Once the loan payments end, the loan also ends.
Floor plan financing is an alternative to a loan. Like a loan, a line of credit also needs to be repaid. But a line of credit is more fluid and versatile.
For example, say a dealership is approved for a floor plan line of $750,000. This means the dealership can borrow up to $750,000 to purchase inventory, though they are not obligated to borrow that much. Floor plan financing has shorter terms than rental fleet financing, typically around 6-24 months. Interest is paid for the full floor plan term, and principal payments, or “curtailments,” are made periodically during the floor plan term, with the balance due in full at the end of the term or as the inventory is sold.
How to Choose the Best Financing Option for a Business
Which is the better equipment inventory financing option: rental fleet or floor plan?
Both can be perfect in the right situation. The best way to determine which to pursue is to weigh the attributes of each against the business’s goals, sales cycles, growth objectives, and other operational needs.
Remember that other types of loans are also well-suited for buying equipment intended for internal use but not resale. As such, it’s common for a business to take advantage of several lending arrangements for different purposes.
If you decide to pursue inventory-focused financing options, start by taking a few best-practice steps.
1. Create a checklist of inventory to purchase
Before applying for any equipment inventory financing, determine which inventory you want to buy through financing rather than paying for it outright. Setting up a straightforward spreadsheet to forecast inventory buys based on seasonal demand, trends, and other factors can be helpful.
2. Have documentation on hand
Good equipment inventory financing lenders want to understand the nuances of your business. The credit application helps begin the story with the business structure, ownership information, and history. Financial statements for the business are often required, and if the business is growing rapidly, projections can be helpful in obtaining sufficient lines to support that growth.
3. Select an equipment inventory financing lender who understands your industry
Although many financial institutions do not offer inventory financing, PEAC Solutions does. With an efficient application process and a quick approval turnaround, PEAC can help you keep up with inventory without lowering the business’s cash reserves.
No business can afford to have popular equipment models out of stock. With PEAC as a financial partner, you can enjoy personalized support from a lender who understands inventory financing and your unique industry needs.
PEAC Solutions is a DBA of Marlin Leasing Corporation. Equipment financing is provided by Marlin Leasing Corporation. Working capital loans are originated by WebBank.