Inventory is the lifeblood of every retail, wholesale, and seasonal business. Essentially, inventory is a business owner’s goods on hand. Inventory is often a significant current asset for most retail, wholesale, and seasonal businesses. Just a refresher for those who are new to running a business, a current asset is cash and any other asset of a business that will be turning into cash within the length of that businesses’ operating cycle (which is typically a year for most businesses). Inventory is typically a buffer between a business owners’ sales of goods and its production or purchase of goods. For all business owners, this means that those businesses that rely heavily on inventory as one of their current assets need to be on top of their inventory management, as well as knowing how to reliably predict the needs of more inventory when the time is right. Since inventory is often the largest item under the current asset category for business owners, accurately counting and valuing all inventory, as well as keeping exceptional records on inventory, are essential to help determine a business owner’s profit or loss.
Inventory Control versus Inventory Management
Many business owners synonymously use the terms “inventory control” and “inventory management”, but what every successful business owner understands is that in order to achieve optimal inventory management, businesses need great inventory control. Since inventory is typically a retailer or wholesaler’s largest current asset, fixing and preventing inefficiencies in their inventory storage areas are crucial to improving profitability. If a business owner has control over the current state of their inventory, they can effectively meet, or even exceed, customer expectations when it comes to product availability – because most customers, especially if they are new customers, will not stay loyal or be a repeat customer if a business does not have a specific product on hand. So what are the main differences between inventory control and inventory management?
- Inventory control regulates inventory that is already on hand, whether it is in a warehouse or at the storefront location. Regulating current, on hand inventory encompasses all aspects of knowing what products are being continuously stocked, how much of a particular item is available, cutting purchases of slow moving products, keeping up with changes in demand to avoid overstock, and avoiding product spoilage. However, the most essential part of inventory control is to know where the stock is in a warehouse, while ensuring that every single item is accounted for.
- Inventory management revolves around the Goldilocks principle, which, as many people know, is the basis for the children’s story of Goldilocks and the three bears. In this famous children book, the preferences for everything are stuck at one extreme or the other (i.e. either being “too hot” or “too cold”); but the middle, or “just right”, alternative is always the preferred choice. This is exactly how inventory management works – by trying to get everything just right. A business owner trying to achieve great inventory management will have the right amount of product, at the right price, at the right time, in the right place! Inventory management essentially includes the forecasting of future needs of inventory and replenishing the needed products efficiently.
As mentioned above – to have great inventory management, a business owner first needs exceptional inventory control. Achieving good inventory control can be difficult if done too late in the game, so making inventory control a priority right away will only help improve any business.
Forecasting Inventory Needs
Inventory forecasting is a way to effectively make informed predictions about purchasing new inventory, or simply replacing popular inventory items. There are a variety of ways to predict inventory needs, and while each inventory need varies from business to business, every single business owner must remember that inventory forecasting is not an art or educated guess, it is a science. While many business owners are capable of doing the math and understanding what factors are needed to calculate these numbers, there are also a variety of inventory forecasting software solutions (which can also be purchased through the use of finance options).
According to the Small Business Administration, small business owners typically borrow money from institutions for four main reasons: to start a business, to expand their business, to strengthen the businesses financial foundation, and to purchase inventory. Inventory loan options are essential for most small and medium sized businesses to thrive; while many business owners would prefer not to take out loans, it is an unavoidable necessity in most business industries today.
Inventory financing is when a business owner cannot accrue enough immediate funds for the purchase of salable goods for their business, resulting in a business owner seeking different inventory funding options. If a business owner cannot keep their shelves stocked, especially during peak seasons, then their business will experience a loss of customers, eventually leading to a decrease in profits. For most small businesses, losing a key customer base can make or break a business. Another reason business owners seek loan options for their inventory needs is when great deals come along. If a business owner has an opportunity to buy a lot of key inventory at a discounted price but cannot come up with the money needed right away, many business owners start to explore different financing options.
- Inventory for small to medium sized retailers is a must. Larger companies like Wal-Mart and Target typically have access to larger institutional banks to help fund their inventory, as well as the steady income to easily pay back those loans, however smaller retail businesses struggle with having easy access to capital, which is why there are plenty of alternative based inventory lending options for small to medium sized retail business owners.
- Small to medium sized wholesalers also need access to funding options for inventory needs. Wholesale business owners typically have a warehouse full of good that is ready to be shipped within a few months, but when looking into the next production cycle, small and medium sized wholesale businesses might not have the resources needed to cover those costs. These reasons also contribute to difficulties in receiving traditional loans, which is when exploring lines of credit and alternative loans can come into play.
Types of Inventory Loans
|Bank||6-10%||3-7 years||14-30 days|
|SBA||6-10%||3-7 years||10-30 days|
|Line of Credit||5-15%||1 – 3 years||7-30 days|
|Alternative||6-25%||1-5 years||5-7 days|
|Cash Advance||1.16-1.55||3-24 months||1-3 days|
|Invoice Finance||1-2% weekly||1 – 90 days||1-3 days|
Bank Inventory Loans
While traditional bank loans for inventory typically offer the best rates and terms, this form of funding can be difficult for smaller sized business to acquire if they lack good credit or have insufficient cash-flow to support the loan.
- Rates: 4-10%
- Terms: 1-10 years
SBA Inventory Loans
The SBA(7a) program offers small business loans that can help a business purchase inventory (among other uses). While the SBA loan process has a reputation as being cumbersome and slow, that isn’t necessarily the case these days. Using the SBA Express program a business can see get up to $350,000, with a very short turnaround time (approvals 36 hours after receiving a loan application, and funding within a week).
- SBA Inventory Loan Rates: 6-8%
- SBA Inventory Loan Terms: 5-10 years
Alternative Inventory Loans
Mid prime alternative inventory lending is useful for companies that need fast business loan to purchase inventory, but lack the creditworthiness that banks require of small business owners. The approval process for a mid prime small business loan usually only take a day or two — if not hours — with funding by the in as little as two days to a week.
- Mid Prime Inventory Loan Rates: 9-18%
- Mid Prime Inventory Loan Terms: 1-5 years
Asset Based Loans
Asset based loans are a way for a business to use their business assets, or commercial real estate as collateral to obtain financing. Assets that can be used as collateral include real estate, inventory, AR and equipment. Asset based inventory lenders generally like to see sufficient equity in the asset in order to provide financing.
- Rates: 6-20%
- Terms: 1-5 years
Inventory Cash Advance
Merchant cash advance inventory loans are the fastest funding of all types of small business financing. Requiring minimal paperwork (application and bank statements) approvals can take a couple hours, with business funding in as little as 24-48 hours. Not only is a business cash advance the fastest funding type of small business loan, it also has the highest approval rates of all types of small business financing. Because of the high risk the business lender takes, a merchant cash advance has the highest rates of all business loans.
- Factor Rates: 1.16-1.50
- Terms: 4 months – 2 years