If your business is responsible for delivering goods (rather than services) to customers, then you will inevitably need to keep at least some level of inventory throughout the standard business cycle. After all, the cost of storing your surplus inventory will be much less than the cost of missing out on a potential sale. Because of this, many business owners will be quite liberal with their inventory estimates. Inventory that is kept on the shelves for an extensive period (especially for businesses using a FIFO inventory system) will begin accruing costs. Though the inventory is not something your business will be likely to throw away, you are probably hoping that there is at least some value that can be extracted from the inventory before it is eventually sold. Well, fortunately, you are not without options. Inventory financing, as the term might suggest, is a loan that uses already existing inventory as collateral. In other words, these loans are issued with a general understanding that if your business fails to abide by the terms of the loan (paying it back in full and on time), the lender will have the right to sell and profit from your inventory.

Inventory loans fall within a broad category of business financing that is considered “leveraged” or “secured.” When all else is equal, having a secured loan will give your business access to loans that it would otherwise not be qualified for or would otherwise be expected to pay a much higher rate for. Inventory loans are a valuable option for many small business owners. In this article, we will discuss 5 ways that your business can leverage an inventory loan to improve its bottom line.

1. Taking Advantage of Discounts from Suppliers

In most industries, the cost of products and materials will vary throughout the calendar year. Oil, for example, is one commonly used resource that typically costs more in the summer and winter than it does in the spring and fall.

Knowing that prices are constantly changing, businesses will need to (at least try to) buy when raw materials are relatively inexpensive. If one of your main suppliers is currently offering a limited discount, you may want to consider using your already existing inventory as leverage, allowing you to take advantage of this sale. This way, you’ll be able to reduce the marginal cost of goods sold (COGS) and ultimately increase your expected bottom line.

2. Inventory Management for the Busy Season

During certain times of the year, demand for your business’ products will be much higher. Rather than consistently keeping the same inventory levels throughout the year, you may want to bulk up during the busy season while trimming your supply during the offseason. This is especially true in the retail space, where December often dominates the rest of the selling season. Using an inventory loan will make this particular strategy much more affordable.

3. Bolstering Working Capital to Pay for Other Projects

While many inventory loans are used when product demand is at its highest, these loans can also be effectively leveraged during the non-busy parts of the business cycle. Suppose your busy enters the slow season with an excessive amount of inventory. Instead of having inventory to sell—or even discarding—this inventory, you should consider using it as the leverage needed to finance projects that would otherwise be out of reach.

These sorts of small business loans will be especially useful for businesses that create their products. If you can leverage the working capital when product demand is low, you could potentially upgrade your equipment or find other ways to improve operations. Then, once the demand is high again, your business will be able to operate even more efficiently.

4. Using Inventory Loans to Pay Down More Expensive Debts

Like all other short-term loans, every inventory loan you apply for with finance companies will have a specific interest rate attached to it. If you have outstanding debt that is currently costing you 10 percent per year and there is an inventory loan available that will only cost 5 percent per year, you could potentially use that loan to effectively restructure your current debt situation.

While the raw interest rates shouldn’t be the only thing you consider when contemplating the possibility of restructuring a loan, it will certainly be quite relevant. In general, if your business can access a loan from an online lender at a lower interest rate (which inventory loans allow you to do), pursuing that lending opportunity will decrease the amount you spend overall.

5. Expanding the Reach of Your Business

As a business owner, every decision you make should be made using a marginal cost-benefit analysis. In other words, before spending a single dollar, you should consider where that dollar could potentially be used most effectively.

In many situations, your business will experience natural “bottlenecks” that prevent it from moving forward. Fortunately, these bottlenecks can often be overcome. If your business is being held back by its lack of a second location, its lack of a major marketing campaign, or the lack of anything else, consider applying for an inventory loan and use that capital to put your business in a better position.

Conclusion

Inventory loans make it easy for your business to leverage its inventory and gain access to additional wealth. By taking advantage of what your business already owns (and has paid for), you can extend your overall reach and move one step closer to achieving your long-term financial objectives.