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Question added to topic MoneyDecember 16, 2009

What is the best source for an inventory loan for a new business?

Is this the best way to improve cash flow? I have a swimming pool construction and renovation company and I'm adding a line of hot tubs and spas to the offerings. Because we are a seasonal business I am concerned about investing too much cash into inventory in the off season.
Congratulations on the new business! It is small business owners like you who will turn this economy around. Also, great to hear that you are looking to grow your business with a new line of products!

Based on the information that you have provided, I'm not sure if obtaining an inventory loan is in your best interest at this time. An inventory loan can be a great financing tool for well established companies with short-term inventory shortages.

Given that you are a new business, it might be difficult to obtain an inventory loan since you don't have extensive sales history and the loan is for a new product line.

Typically, lenders prefer to give an inventory loan to companies with consistent sales history on a proven product to avoid the scenario of a company defaulting on its loan.

In your case, even though the loan will be secured by the hot tubs and spas and you seem to be a growing business, there is risk in financing a new product line. The economy is still struggling and the demand for hot tubs and spas may be very difficult to project--even for the business owner.

From your perspective, getting stuck with unsold inventory that is secured by the bank is no fun--especially the high interest payments due.

I think what may make sense is to test the product out this upcoming season with a small inventory order and use your working capital to fund the operation. After testing the product out on a small scale then reassess if the inventory loan makes sense for your business--sometimes it is about taking baby steps.

I have provided some guidance below of when it may make sense, and when it may not make sense to obtain an inventory loan.

Generally, companies will want to consider an inventory loan if they have:

1. High Inventory Turnover Rates
2. To Keep High Inventory Levels to Meet Demand
3. Easily Sold Inventory
4. A Mature Product with Steady Sales History
5. A Clean Balance Sheet with Little Debt

Generally companies will NOT want to consider an inventory loan if they have:

1. Obsolete or Aging Inventory
2. Difficulty Selling Inventory
3. To Use the Loan as a Long Term Financing Tool
4. A Balance Sheet with a High Amount of Debt
5. A Brand New Product with Little to No Sales History

I hope this guidance is helpful to you and good luck with your new venture! Let me know how it goes.

Ryan Himmel, CPA and registered securities analyst, is the founder and CEO of BIDaWIZ.com, a professional network for small businesses and entrepreneurs to obtain trusted advice and services from a team of CPAs, Enrolled Agents, Financial Planners & Tax Attorneys.  His team provides answers to the many finance and tax questions that small businesses encounter every day. Ryan has been quoted in The Wall Street Journal, Forbes, Fox Business and Crain's New York, among other publications. Ryan also regularly contributes to the community with his finance and tax blog.

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