When you are starting your online store, buying inventory is a costly business. Even when your shop is up and running, funding your stock can be expensive. You want to avoid being out of stock and wish to expand your product range once in a while. Stock finance, also known as trade finance or inventory finance, can be the solution to this problem.
What is stock financing?
Stocking your products is not cheap. From the stockroom itself to inventory management software and, most importantly of all, buying in bulk what you want to sell in your store.
Especially when you are first starting out, it will take some time before you can profit from sales. And once your shop is growing, it can be hard to keep up the stock with customer demand. Especially when you work with raw materials or when you also have to invest in other software systems, marketing and customer service, this can cause a few financial headaches.
Once your store starts growing, it can be hard to keep up with demand.
Luckily, stock financing can lighten the blow. Inventory or stock finance means you take out a loan to pay for your stock, while you maintain ownership of the products. Once you sell the products, you pay the investor back. You will also have to pay interest over the loan and sometimes the security for inventory finance is the stock owned by your business.
Pros of stock finance
So, why would you choose stock finance for your business? Firstly, it can relieve entrepreneurs that have a lot of capital stuck in inventory. Do your products take up a lot of space in your warehouse, like machines of vehicles? Or are your products quite expensive, such as tech gadgets? Then your stock will take up a lot of funding resources that could be spent elsewhere.
Others may be starting out and will need to buy a lot of stock in a short time. Also, when your shop starts growing fast, you will need to increase your inventory. Stock finance can free up your working capital and cash flow, so you can keep on building your business and other assets.
Stock finance can free up your work capital and cash flow, so you can keep on building your business.
If you import and export internationally, stock finance can be a lifesaver. It may take a long time to ship orders from point A to point B and products can get stuck overseas. With stock finance, at least you can still pay your inventory supplier and prevent further delays. Also, you will have extra funds to fasten those delivery times.
Is stock finance profitable for my business?
Stock finance can be a good funding solution when you are starting out, growing fast, or need to stock up right before a sale or seasonal peak. Therefore, stock financing may be the most profitable in the short-term. Why? Because over time, your owned stock will grow and change. Ideally, you are able to sell your stock in a short time period, and repay any finance fast. This makes long-term inventory finance more complex and possibly more expensive.
Stock finance works best when you are able to sell your stock in a short time period.
Also keep in mind that stock finance is best suited for online shops that invest significant amounts into their inventory. If you have a small stockroom with a few inexpensive products, stock finance will not be profitable for your business. However, if you have a lot of resources going into products and pressure on your working capital as a result, stock finance can be a wise decision.
How to finance your inventory
Banks are usually not willing to finance inventory, unless they see it as assets with high enough value or when you take out a bigger loan for your overall work capital. Even so, banks can be hesitant and it is difficult to get approved.
Apart from the bank, there are several fintech companies that specialize in short-term business loans. These types of loans are a perfect fit for inventory finance, because you want to be flexible. You may need a lot more stock when there is a sale coming, for example, than during the rest of the year. And costs will be higher when you are just starting out, since you will need to build your inventory from the ground up.
Short-term loans suppliers
There are several short-term loan suppliers active in the European ecommerce sector:
Short-term loans: what to look out for
Financing your stock with a short-term online loan is faster than the bank and offers some flexibility. But be aware that financial platforms have their own revenue model, so you will have to pay interest over the loan. All in all this can turn out to be expensive. Thus, you have to be quite sure that you will make a good profit from your stock investments. For example because you will be able to ship faster, sell more of the same item and more types of products.
Although the bank is much more selective, online lenders will also have some criteria for loan applications. For instance, they will want to look into your financial numbers, since the payback is revenue-based.
Buying stock with supplier credit
Buying stock with supplier credit is less of a hassle, since your supplier knows your purchasing behaviour like no other. They want to finance your stock, simply because you will be buying it from them. In turn, this limits the risk of investment for your supplier.
Buying stock with supplier credit is less of a hassle, since they know your purchasing behaviour like no other.
And because they have the best odds to sell the existing stock to someone else, supplier credit is much cheaper than taking out a loan. The application process is also easier and therefore faster.
Some suppliers can also offer dropshipping. This means you can sell products in your online shop, but you only buy the stock once an order has been placed. Dropshipping ensures a low risk for both you and your supplier. It also means more paperwork and lower profit margins, though. It is therefore most profitable for niche products in the so-called long tail.
Conditions of supplier credit
Just like a bank or lending platform, your supplier will have some criteria. For example, they will ask for certain terms of payment, payment conditions and a maximum amount of credit. Often times you will need to pay an advance. Some suppliers may also ask you to pay interest over your supplier credit.
Also keep in mind that some suppliers may demand a retention of title. In other terms, they will have legal ownership over the stock owned until you have fully paid for them. Suppliers can also choose to stop offering credit whenever they please. Read the terms and conditions carefully, so you are prepared for any unpleasant surprises.
Supplier credit: what to look out for
Supplier credit sounds ideal, since it is an easy and inexpensive form of stock finance. But there are some things to think about. First of all, there is the risk of becoming too dependent upon your supplying company. The supplier knows you financially depend on them. This can be a bad starting point for negotiations. If you exceed your terms of payment, your supplier can halt delivery or ask for immediate payment before shipping. So keep a close eye on your payment terms. You want to avoid a failed payment at all costs.
Furthermore, stock finance through supplier credit may result in losing possible discounts. Other buyers that pay faster, will often be rewarded with a generous discount by the supplier. This can really add up on a yearly basis. Make sure to compare the low cost of supplier credit with any favourable discounts, and decide which is more profitable in the long run.
This entails raising funds from the masses on crowdfunding platforms, usually in exchange for exclusive benefits, such as a free product, discount in your store or even a small share of your company. You can also offer pre-orders, so as to predict the amount of sales and how much to stock up on.
Fund your stock by pre-sales
Because online shops are often well known and loved by their customers, crowdfunding can be the perfect fit if you can mobilize your customers or fanbase. Especially if you are in need of a significant amount of time. There are several online stores that have raised tons or even over a million euros through a crowdfunding campaign.
A good crowdfunding campaign takes a lot of time, but is an ideal way to mobilize your customers or fanbase.
Even if your supplier can offer you credit, it may be more profitable to opt for crowdfunding. Suppliers will usually pitch in when asked, because they know you will spend the funds in their warehouse. And since you will not need supplier credit anymore, you can still benefit from your supplier’s generous discounts or favorable conditions.