5 stock financing solutions for 2024

What is inventory financing

Definition of inventory financing

Inventory financing is a mechanism enabling companies to finance the purchase and storage of their goods to meet customer demand.

If your demand is growing, if you've found new suppliers willing to invest, or if your business is thriving and needs more inventory, inventory financing can be an interesting solution. Indeed, when your business starts to grow, it can be difficult to keep up with demand, and inventory management can be costly.

Inventory financing involves taking out a cash flow loan to pay for your inventory, while retaining ownership of the products. When you sell the products, you repay the investor and pay interest on the loan. The collateral for the financing may be the stock held by your company.

It's a financing mechanism that frees up working capital from inventories such as finished goods or raw materials to meet your production needs. It should be noted that inventory financing differs from direct working capital financing in that it concerns the movement, purchase and/or sale of goods and services, both nationally and internationally.

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Example of seasonal stock financing: BlackFriday & Noel

To illustrate how inventory financing works, let's take the example of an online toy retailer preparing for the fourth quarter of the year, a period that includes Black Friday as well as Christmas.

This period represents a high demand for toys and can be an opportunity for the company to increase sales.

However, the company needs to finance a large stock of toys to meet seasonal demand, and does not have the funds to purchase this stock. It therefore decided to use an inventory financing solution to meet its cash flow needs.

In this way, the company can contact a financing player to obtain an inventory financing loan to purchase enough toys to meet Christmas period demand. It uses past sales projections and current trends to determine the quantity of toys needed to meet demand during the peak period.

Thanks to inventory financing, the company will be able to order and stock a sufficient quantity of toys to meet demand over the Christmas period. This will enable the company to maintain a stable stock level while ensuring customer satisfaction.

When the Christmas season arrives, the company will sell its toys and repay the bank with the proceeds generated. Interest on the cash loan will also be paid. The company will thus have succeeded in maintaining a stable cash flow while meeting seasonal demand and ensuring long-term business growth.

Other specific uses of inventory financing

Inventory financing can be a very useful financing solution for companies with :

• seasonal activities
• operating cycle requiring the immobilization of cash

In fact, these companies need to plan for large quantities of stock in order to benefit from attractive prices. This requires a considerable amount of cash.

Without adequate stock financing, these companies run the risk of encountering major financial difficulties that could hinder their long-term growth.

Another case where inventory financing is key is for brands whose products are sourced from far-flung regions such as Asia. Often, the brand has to advance substantial costs before it can sell its inventory.

This financial tie-up means a large down-payment when the order is placed, or a balance when the goods leave, over a period of several weeks. What's more, shipping can take up to 5 weeks, meaning that brands have to wait several months before they can sell their products.

Inventory financing can therefore help these brands overcome these challenges by providing the liquidity they need to purchase their inventory and anticipate the cash flow lag associated with payment terms and transport times.

How do you finance your stock?

1. Revenue Based Financing, the most suitable solution

How it works?

Revenue-Based Financing(RBF) is the most suitable financing method for meeting short-term cash requirements.

Unlike traditional bank loans, which often require personal guarantees or a solid credit history, Revenue Based Financing works on the basis of an income study.

In other words, RBF enables companies to obtain inventory financing based on their ability to generate revenues, and thus preserve their working capital requirements .

This financing solution is particularly attractive for companies with substantial short-term financing requirements, which can be flexibly reimbursed according to the income generated by the sale of inventory. These revenues can be regular, irregular or seasonal.

Benefits

The Revenue Based Financing (RBF) offers a number of advantages for companies seeking to finance their inventory. Firstly, the process is straightforward, and can be carried out entirely online thanks toopen banking, without the need for complex documentation. What's more, financing can be obtained quickly, in as little as 48 hours.

FBR is also flexible. Unlike a traditional loan, repayment is based on a percentage of the company's revenues. This means that if activity is low during a given period, the company will repay less, whereas if activity is high, it will repay more. This makes it easier to adapt to seasonal fluctuations, and avoids over-burdening the business in off-peak periods.

In short, RBF offers a simple, fast and flexible financing solution for companies looking to finance their inventory, while adapting to seasonal fluctuations in their business.

Disadvantages

One of the main drawbacks of Revenue Based Financing(RBF) is that it is generally reserved for companies that already have established sales.

Indeed, to be eligible for FBR, it is often necessary to justify a certain level of income, which can vary depending on the service provider, but is generally around €300,000 in minimum sales.

2. Bank loans

How it works?

The traditional bank loan is a financing method financing for classic e-tailers wishing to finance their inventory. How it works is simple: the company simply applies for a cash loan from a bank to finance the purchase of its inventory. The bank then studies the loan application and examines the company's financial documents, such as its financial health (shareholders' equity, etc.), cash flow and credit history. Based on these elements, the bank decides whether or not to grant a loan.

If the cash flow loan is granted by the bank, the company has a certain amount of money at its disposal, which it can use to buy stock. It then repays the loan in regular, usually monthly, instalments, including the capital borrowed and interest. Note that the term of the loan may vary according to the amount borrowed and the terms agreed with the bank.

Benefits

Bank loans can be used to finance different types of inventory, whether raw materials, finished goods or goods in transit. Companies can thus finance a wide variety of inventories according to their needs.

Disadvantages

However, this financing solution for e-merchants does have its drawbacks.

First of all, bank loans can be difficult to obtain, especially for small businesses or those with poor credit ratings. Banks tend to require collateral to protect themselves against the risk of non-repayment.

In the case of stock financing, bank loans impose strict and rigid repayment conditions.

In addition, interest rates on bank loans can be quite high, which can make inventory financing more expensive in the long term. Companies therefore need to be prepared to manage these additional costs, and to ensure that their business model enables them to repay loans on time.

Repayments are spread over long periods of up to 10 years, forcing companies to manage their cash flow over the long term.

Finally, bank loans can be subject to restrictive conditions. For example, banks may require that funds be used for specific stocks, or repaid on specific dates. So it's important to read and understand the terms and conditions of a cash flow loan before committing yourself.

3. Credit directly from supplier

How it works?

Supplier direct credit is an inventory financing solution that involves the supplier offering credit to the buyer for the inventory purchased. This method of financing avoids the need to go through a bank or other external lender.

In this case, the supplier grants credit to the buyer for a certain amount or period of time, with defined payment terms. This may include interest or additional charges, depending on the repayment period. Invoicing and payment will therefore take place at a later date, when the inventory is received.

Benefits

Firstly, suppliers can offer advantageous inventory access conditions for companies, enabling them to purchase products on credit or at preferential rates. This can help companies gain rapid access to large inventories without having to mobilize substantial amounts of cash, which can then be used for other expenditure items.

Secondly, having a direct link with the supplier can also make it easier to negotiate payment terms and process orders, which can reduce the administrative costs associated with purchasing and inventory management.

Finally, this form of financing can enable companies to strengthen their relationships with their suppliers by establishing a relationship of mutual trust and collaboration.

Disadvantages

However, this method of financing for e-tailers has a number of drawbacks.

Few suppliers accept this method of financing, making this solution almost inaccessible.

Moreover, to benefit from this option, it is necessary to have a close relationship with the supplier and to place large volumes of orders. As a result, credit directly from the supplier can entail exclusivity, which can limit the brand's choice of suppliers and products.

4. Fund raising

How it works?

Capital raising is a financing solution in which the company must open up its capital to other investors in exchange for funds to finance its activities. In the context of inventory financing, a company can use a capital raising to finance the purchase of inventory, or to strengthen its working capital in order to better meet customer demand.

The fund-raising process usually begins with the search for potential investors, such as angel investors or investment funds. Once potential investors have been identified, the company prepares a detailed business plan explaining the company's activities, growth opportunities and financial projections.

The investors will then examine the company's business plan and decide whether they are ready to invest. If the investors are interested, they will negotiate the terms of the investment, such as the amount invested, the investor's share of ownership, voting rights and exit conditions.

Benefits

Unlike bank loans, fund-raising does not require collateral to obtain funds.

In addition, investors can provide more than just financing, they can also contribute their experience, network and expertise to help the company grow.

Fund-raising can also offer a solution for companies having difficulty obtaining bank loans due to their size or lack of collateral.

Disadvantages

While raising capital can be an attractive stock financing solution for companies, it also has several drawbacks.

One of the main disadvantages is that it leads to capital dilution, meaning that investors acquire part of the company in exchange for their financing, thus reducing the founders' share of ownership.

What's more, fund-raising can be time-consuming and require a lot of work to find interested investors, prepare presentations and negotiate financing terms.

Finally, fundraising can be costly, as founders must hire lawyers and advisors to help with the application process, in addition to due diligence and valuation fees.

5. Pre-order inventory financing

How it works?

Pre-sales, also known as preview sales, is an inventory financing strategy that involves selling products before they are produced or released on the market. This financing solution for e-tailers enables them to raise funds to finance their inventories, while at the same time assessing demand for a new product or range through upstream orders.

In this case, pre-orders can be placed online or via crowdfunding campaigns.

This method of inventory financing is becoming increasingly common, particularly for emerging brands that have difficulty obtaining financing from banks or investors.

Benefits

Pre-sales offer a number of advantages for inventory financing. Firstly, it minimizes the financial risks associated with the production of unsold products. This solution provides immediate cash flow.

By selling products before they are produced, companies can have an accurate estimate of demand for the product and adjust their production accordingly.

In addition, pre-sales can enable companies to raise funds to finance their inventory without having to invest their own resources.

Disadvantages

Although pre-sale is an attractive solution for inventory financing, it also has its drawbacks.

Firstly, it's important to point out that not every company can take advantage of this option. This is because the products sold must be innovative or generate strong customer interest to encourage them to buy even before the product is available. Companies without such products will therefore not be able to use this solution.

Secondly, setting up a pre-sale requires a significant marketing investment. Potential customers need to be convinced of the benefits of buying before the product is even available. To achieve this, costly advertising campaigns are needed to publicize the product and arouse customer interest.

Conclusion

As a result, there are several inventory financing solutions that can help you meet the financial challenges associated with inventory acquisition. Of all these solutions, Karmen is the best because of its simplicity, speed and flexibility.

Karmen's Revenue Based Financing is 100% online, perfectly suited to companies generating over 300k in annual sales, and enables financing to be obtained in less than 48 hours. What's more, short- and medium-term repayments are tailored to each company's sales cycle.

All the options we have presented may be of interest depending on your use case. However, if you are eligible, RBF remains the best option for stock financing. Interested? Test your eligibility in 2 minutes.

Optimal management of inventory financing also requires a good command of professional payment tools . The Lettre de Change Relevé (LCR) represents a strategic lever enabling companies to better manage their collections while securing their transactions. By offering negotiated payment terms and greater visibility over due dates, LCR can help optimize the cash flow cycle, thereby facilitating inventory financing. This dematerialized payment solution is particularly relevant for companies seeking to maintain a balance between their inventory investments and their working capital requirements.