Obtaining inventory finance can be a great way to keep the work in progress running especially for small or new businesses that do not have a credit history or have had some trouble with their credits in the past. It does not only help the business in keeping a backup inventory but it also provides liquidity needed to carry out various business operations including revenue expenditures.
Along with this, inventory financing has an additional advantage of increasing your short-term liabilities on the balance sheet only, which does not damage the debt to equity ratio in the long term. Therefore, with the inventory finance, the liquidity and market ratios of the company are not affected which builds in confidence for the investors and gives a positive reputation to the company.
However, for very obvious reasons, inventory financing is not the best option for every business. Not all businesses have physical inventory that can be counted and whose cost can be estimated. A major problem that many of the inventory financiers face is putting a monetary value on the inventory. The common procedure is to calculate per unit cost of each step of work in progress and then determine the final cost of inventory. However, a mutual agreement needs to be met between the firm and the financier before the line of credit can be decided
In addition to this, there are charges attached to this line of credit. Since financial institutions are aware of the fact that businesses are in desperate need of cash, they usually take advantage of the situation and charge high interest rates and administrative fees extra for the line of credit they provide. The applicant business will also have to prove its reliability before the loan can be sanctioned.