If your Canadian firm is ‘ inventory intensive ‘ then an inventory financing solution has to be an optimal part of your overall working capital strategy . Unfortunately it has probably never been more difficult to access the amount of financing you need for inventory in order to maintain and grow sales and profits.
Let’s review some of the key basics and then outline what types of solutions are available to your firm. The essence of inventory financing is simply the ability of your firm to generate a short term advance, or operating facility based on the amount of inventory you have on hand. A couple of key concepts come into play here. One is simply valuation – meaning of course there has to some agreement between you and an inventory financier as to what value can be placed on inventory.
We can appreciate to a certain degree the conundrum that Canadian chartered banks have with inventory – which is simply – how do we understand it! There are hundreds of different industries and business models in Canada, and the ability of any one entity to understand what the value of a certain industry inventory is, and more important, how it could be remarketed in liquidation is of course the challenge. As a result, as we have inferred, the banks have tended to shy away from advancing any significant amount of financing against inventory. When financing is in fact advance it tends to be very formulaic, and, similar to the receivables advance, very focused on your overall operational, financial, and collateral situation.
What Canadian business owners actually need is for a true inventory lender to work with them to understand what the maximum amount of funding can be given against ongoing inventory on hand. Again we will raise one other technical point, which is when we talk to inventory it can be in the form of raw material, work in progress, or finished goods. Those three categories alone of course require a whole additional subset of lender knowledge.
Fortunately there are firms in Canada who are very focused on inventory financing – in some cases these can be in the form of floor plan financing , although the purpose of our information here is pure inventory financing .
We recommend clients work with a trusted, credible, and experienced advisor in this area – one who can deliver an inventory solution that either compliments your existing financing arrangements, or, in some cases perhaps replacing your current financing with a very focused and specialized asset based line of credit that maximizes the total value of your receivables and inventory.
When inventory plays a key role in your company’s sales process your ability to generate cash flow and working capital on an ongoing basis against this asset will ultimately prove to be a major competitive advantage for on going growth and profits.