Traditional inventory financing has its place in the toolbox of scaling brands, but Treyd is putting a new spin on things. We go through how inventory finance usually works, the pain it solves (plus the ones it creates) and how Treyd’s alternative financing model offers a new, more straightforward solution to companies facing similar challenges.
What is inventory financing and who it benefits
Inventory financing is a method of raising finance where brands use existing stock (an asset) to access finance. The amount they get depends on the value of their inventory.
Picture a bulletproof socks retailer using the stock left over from the slow months, to secure finance and buy inventory for the holidays, when people are gifting bulletproof socks (and yes… bulletproof socks are a thing.)
This type of financing is vital for merchants who expect a surge in demand beyond their existing stock levels, but don't have enough cash to order more inventory before the surge. Many seasonal products fall into this category.
How traditional inventory financing works
There are two models of inventory finance: a lump sum and a credit line.
In both, the lender appraises existing stock to determine how much financing the merchant receives. Instead of the inventory’s retail value, the goods are appraised based on factors such as their physical condition, location, marketability and economic conditions at the time of appraisal. This is known as the liquidation value – and it’s significantly lower than the retail price.
After valuation, the lender loans 50% to 80% of the appraised inventory value. If the amount isn't enough to purchase the needed inventory, the merchant will have to raise the rest of the balance elsewhere.
(You'll see ahead how this differs from Treyd's approach.)
In one model of inventory financing, the merchant gets a lump sum amount to be paid back in monthly instalments once they start selling their new stock.
In the other, brands get a line of credit that's accessible whenever inventory needs arise. Once they have repaid the amount used, their credit line goes back to the original amount.
The inventory purchased with the financing is used as collateral and will be sold by the financier if the merchant defaults on the loan.
As such, this type of financing comes with lots of due diligence – the brand's premises and the existing stock are inspected before the loan is given, as well as throughout the lifetime of the loan (sometimes every 3 to 6 months).
What are the costs?
Users of inventory financing pay back the principal amount, interest, and administration fees used on inspections and stock valuation in monthly instalments. This makes traditional inventory financing more expensive than other models.
In order to cover these costs, you will notice financiers with high minimum loan amount requirements – as high as $700,000.
Why companies find inventory financing necessary
There are merchants with contractual agreements, which require stock volumes to remain above a certain amount. They use inventory financing as a way to increase stock without having to sell existing inventory.
For those using e-commerce platforms such as Amazon, if you run out of stock it could take up to four weeks to get your sales rankings to pre-outage levels. Inventory financing helps them keep consistent stock volumes.
How Treyd offers a simpler alternative
In essence, what Treyd solves is very similar to what inventory financing is used for: helping companies finance their stock, so they can keep good levels of inventory while still maintaining working capital.
However, the way Treyd works is a bit more straightforward. Companies receive a credit limit with Treyd – which they can use to pay their supplier invoices. Treyd pays on behalf of the merchant, who can choose to pay Treyd back in 1-4 months.
This lets them secure inventory without spending their own cash for up to 120 days – so they can avoid tying up money in new stock that might take months to arrive. In fact, they usually can already start selling the goods before they have to pay for it.
There are multiple pain points that come with the traditional inventory financing arrangement, which you can skip with Treyd. Here's how:
Fairer credit limits, based on financial strength
In traditional inventory financing, lenders use the value of existing stock to determine how much money to give merchants. So you only get as much as the quality and marketability of your inventory.
With Treyd, the credit provided is based on the applicant's financial standing. So a fast-growing company whose sudden six-month surge in revenue might not count for much in inventory financing is likely to get a fairer limit to meet demand with Treyd.
Straightforward repayment terms
When submitting a supplier invoice to be paid by Treyd, customers select the payback period they want (between 1 to 4 months) and only have to part with cash at the chosen date. This ability to defer invoices by a few months helps avoid dreaded cash flow dips.
The final repayment invoice sent to Treyd customers includes a flat fee charged on top of the original invoice amount. The fee is based on the strength of the applicant's financials and the chosen repayment terms – and is always clearly communicated before the customer submits their order.
In traditional inventory financing, when the “lump sum” model is used, merchants pay back a monthly instalment throughout the loan period. The benefit is that they get new inventory to sell during periods of high demand. The downside is that they have to pay out cash during the payback period even when demand falls. These two financing models impact cash flow differently. Something to keep in mind.
Of course, Treyd also has a shorter repayment horizon compared to traditional inventory finance, which, for a business growing fast, can be a worthwhile trade-off.
No security taken
Merchants use their existing stock as collateral in traditional inventory financing – so it comes with a lot of administrative hassle, with multiple inspections that continue throughout the loan term.
With Treyd, customers don't need to provide security or offer their inventory up as collateral to access financing. So everyone can skip all that hassle. This is possible in part because Treyd’s model bases credit assessments on good, current data – and the fact that the money goes directly to suppliers.
If you are looking to get funding for your inventory purchases and this sounds like an interesting alternative for your business, get in touch with the Treyd team to see how we can help.