Lauren writes about inventory for Sortly. Her favorite thing to organize? Her comically large collection of stuffed animals.Lauren
Stocking your shelves can be a challenge when so many other things are demanding your limited capital. Shiny new equipment needs to be purchased, employees need to be hired and trained, rent needs to be paid…here’s a seemingly never-ending checklist of expenses. With so many costs, it’s hard for small business owners to maintain adequate inventory.
When you have insufficient inventory, your business loses sales and misses opportunities to acquire new customers. But that doesn’t mean you should go and fill up every shelf with 24 months’ worth of product—you only have so much working capital. Your small business should strive to keep enough inventory to cover customer demand, but not too much that the expenses for buying and storing your supply financially debilitate your business.
So, when you have a growing list of immediate expenses pulling at your available cash, how in the world are you supposed to finance your upfront inventory investments? Good question. First, let’s explore how much money you’re actually going to need. Once we know that number, we can discuss your different options for small business loans.
There’s a magic Goldilocks-approved amount of inventory you should maintain: not too little, not too much. There’s a variety of forecasting methods to find the amount that’s just right. Let’s look at a few.
Passive demand forecasting assumes that if you expect no business changes (new products, expanded marketing campaigns, additional hires), then the demand will remain the same. If you expect to have an uneventful year ahead of you, it may be safe to assume your sales will remain unchanged. If that’s the case, then you know exactly how much inventory you need to have on hand: enough to satisfy last year’s demand.
If you have years of sales data to look at, time-series analysis can help you identify seasonal trends to pinpoint where demand rises and falls. For example, time-series analysis could help a clothing brand identify when customers start buying swimsuits, when they stop, and how much they usually purchase. With this information, the business will know when to invest in swimsuit stock, how much they’ll need, and when it’s acceptable to let the remaining inventory peter out.
Causal forecasting is a more advanced forecasting method that businesses with years of qualitative and quantitative data can utilize. It considers several factors, including:
And that’s just scratching the surface of everything that causal forecasting takes into account when estimating demand.
Pro Tip: There are also several inventory control methods that can help you maximize profits with the least amount of spend on inventory.
Inventory management software, like Sortly, can do the tedious work and alert you when stock levels are too high or too low — allowing you to make the most of your working capital, rather than having it tied up in unnecessary storage costs, excess inventory, and deadstock.
Now that you have a ballpark inventory estimate, you’ll need to find the upfront cash to stock the shelves. Waiting to make sales to finance your inventory is a strategy for slow growth and missed opportunities. You need something with more leverage, more potential, and more flexibility: a business loan.
Here’s why you should consider using a business loan to finance your upfront inventory costs:
There are several small business loans you can use to finance your inventory costs. Each has its pros and cons that make them ideal for different situations.
In the wake of COVID-19, the Small Business Administration (SBA) is offering several different loan programs to help struggling businesses get back on their feet.
Through the Economic Injury Disaster Loan Program, small businesses can apply for low-interest working capital loans of up to $2 million. According to the SBA, “these loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the disaster’s impact”. Interest rates for EIDLs are 3.75%, and terms extend up to 30 years in an effort to keep payments affordable.
Of the $2 trillion stimulus package, $349 billion has been allocated to support the newly introduced Paycheck Protection Program. Administered by the SBA under their popular 7(a) lending program, this initiative offers small businesses zero-fee loans of up to 250% (or 2.5 times) your average monthly payroll with a flat 1% interest rate. And as long as you maintain your workforce, any portion of the loan you used for payroll and debt obligations will be eligible for forgiveness. There’s also no personal guarantees or collateral required, as these loans are 100% federally-backed.
Inventory financing is a loan you can use to purchase inventory. Because it’s an asset-based loan, the inventory is the collateral for the loan, decreasing the risk for the lender (meaning it’s easier to qualify for better rates and terms). Inventory financing is an excellent option for new businesses or those struggling to secure more traditional funding—like a term loan.
Unfortunately, there’s not a lot of flexibility with inventory financing. You use it to fund your inventory. That’s it. Plus, you’ll also be potentially subject to planned (or surprise) inspection visits from your lender to see if you’re correctly storing inventory to prevent damage or depreciation.
If you want a simple, predictable way to finance your inventory, look no further than a term loan. A term loan gives you a lump sum of cash that you pay back (with interest) in recurring payments over a set amount of time. No fluff about it—just your classic loan. You get the benefit of predictable payments so you can forecast exactly when and how much inventory you need to sell to pay back the loan.
A business line of credit is one of the most flexible forms of financing. You can use your line of credit to finance just about anything, and you’re under no obligation to use it. That means you could secure a line of credit (just in case), and you may never even need to use it.
A line of credit is a foolproof financing option if you’ve faced unpredictable spikes in the past and aren’t sure how much additional capital you’ll need. Keep this financing in your back pocket to capitalize on vendor discounts or stock up quickly if the shelves start to empty unexpectedly.
If you don’t qualify for traditional business loans, a business credit card can help finance your inventory costs. Getting approved is quick and easy. Plus, you can use your card on just about any business expense: inventory costs, warehouse rent, insurance, shipping expenses—you name it!
Vendor financing is a great way to finance your inventory if you’re a new business with low or non-existent credit. Vendors often provide payment options to allow you to purchase inventory now and pay for it later. Depending on the vendor, they may give you 30 or 60 days to make your payments.
Short-term loans are like term loans—just faster. If your inventory turns over regularly, it might not make sense to lock yourself into a 5-year term loan to pay for this year’s inventory. A short-term loan gives you quick access to capital that you’ll pay back over 6 months to 3 years. Short-term financing like this is a great way to fund inventory that flies off the shelves quickly.
You need money to make money. Fortunately, you don’t need a pile of bills sitting around to get your cash flow moving. Use these inventory financing options to free up your cash flow while keeping your shelves stocked.
Bio: Samantha Novick is a senior editor at Funding Circle, specializing in small business financing. She has a bachelor’s degree from the Gallatin School of Individualized Study at New York University. Prior to Funding Circle, Samantha was a community manager at Marcus by Goldman Sachs. Her work has been featured in a number of top small business resource sites and publications.