Inventory Finance – Not for the Faint of Heart

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I recently spoke to a 35 year veteran of the inventory finance space to discuss any new initiatives here.  According to this veteran, there are not many standalone inventory lenders doing deals between $500k to $5M that are bankable.  Most of the banks do not touch this stuff.  These are the kinds of deals where you have a company that does $10M in revenue across 7 retail stores and the banks won’t give them financing.  Their inventory is hard to value and they continue to lose money as they build brand.

There are firms that will help companies borrow against inventory.  In the boutique retailer’s case above, if they have $3M in inventory, they can get an inventory loan for 50% of that or $1.5M.  So they sell the inventory and our lender gets paid back.  Sounds easy right?

  • Well first, you need to get that inventory appraised.  How do we know its worth $3 million.  So there is an industry of appraisors that provide this service before any funding takes place.
  • How do you track that inventory has been sold?  Again, you need to have the right combination of freight forwarders and other logistic partners to monitor inventory movement.    You may have people in the warehouse that tell you when inventory goes out, track the terms of sale, who bought it, etc.
  • If your inventory finance client sells to Sears or Walgreens or whomever, you also need to track the payment.  Many times the payment will be factored, so you need to collect back the money from the factoring company.  How do you ensure the factor with an invoice of $200K that you get your share?  The factor will advance to this client for the receivable, so out of the $200K invoice to Walgreens, the factor advances 160K to the client but gives 80K to the inventory lender assuming inventory finance is 50% of cost on $200K of inventory.  This is another added complication.  You need to have an intercreditor agreement with that factoring company.

What happens if Sears or Walgreens becomes a bad credit, the inventory finance company has to be careful, because you get the dark hole problem.

This is a real specialized area – it’s not for the OnDecks, LendingClubs, or MarketInvoices of the world.  As you can see, it is not for the faint of heart.  It’s all very specialized, labor intensive and hard to have technology be a game changer.

If you are interested in learning more about an upcoming study on how middle market companies will use credit facilities and alternative finance techniques, please contact me at dgustin at tradefinancingmatters.com  I will be interviewing and surveying middle market companies to explore these issues much deeper.

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