FREE online courses on How to Manage Cash Flow - Chapter 3 - Inventory
Financing
Inventory financing is
similar to receivable financing. Inventory financing has the following
requirements:
1.
Inventory must
be highly marketable.
2.
Inventory is
non-perishable and not subject to obsolescence.
3.
Inventory
prices are relatively stable.
There are three forms of
inventory financing:
The financing company
will place a lien on your inventory; i.e. they obtain a security interest in
your inventory in exchange for lending you cash. You continue to manage and
control the inventory.
The financing company
obtains an interest in a certain segment or part of your inventory. You will
have to separate the inventory that you use for financing from the inventory not
used for financing. This may require physical separation as well as separate
accounting.
The financing company
lends you money for a specific item in your inventory until you are able to sell
it. When you receive cash for the inventory sale, you pay the financing company.
For example, car dealerships often buy automobiles by financing the purchase.
When the car is sold, they payoff the financing company.
Example 11 --- Calculate
Costs of Financing Inventory
You have arranged for
financing against $ 200,000 of your inventory. You will need financing for four
months. The warehouse receipt loan costs 18% with 80% advanced against the
inventory value. Additionally, you will have to separate your inventory and
maintain separate records. This will costs about $ 6,000 over the four-month
period.
Interest Costs = .18 x
.80 x $ 200,000 x ( 4 / 12 ) =
$ 9,600
Internal Costs 6,000
Total Costs for 4 months
$15,600
