Finance » Equipment Financing » Article


Borrowing Money to Finance your Inventory - FACTORING

By Jim Antonilli
Filed under: Equipment Financing         Words in this Post: 510



Print This Post Print This Post AddThis Feed Button

Borrowing money to finance inventory is called “factoring” in the retail trade, and is probably the easiest type of credit to find. All you need to do is show a lender you are a successful seller, and you can turn the inventory over rapidly. The lender retains ownership, but not possession, of the inventory until it is sold. A typical contract might give you a $50,000 line of credit to buy inventory. The contract will provide money to buy the inventory and sell it in your store or on your store or website. Each month, you will have to file a report with the lender listing the amount of inventory sold. You will then pay this amount back to the lender with interest.

Here is an example: you have been buying electric scooters from an importer at a price of $90 each in lots of 50 and selling them in your store for $150 each. At this price you are able to sell 25 units a month. The scooters have been selling so well that you decide to take out a loan to purchase larger quantities of scooters directly from the manufacturer.

You purchase $20,000 worth of electric scooters from a company in China. Because you are importing directly in container-sized quantities, you get a very good price. You are able to buy the scooters for only $60 each. So you will be making an additional $30 on each scooter.

The finance company is charging you one percent interest per month on the out-standing balance of your inventory. You were able to buy 333 scooter s for the $20,000, and by lowering your price $10 under the competition you ire now able to sell 50 units a month. At this price you are still making $20 more on each scooter, but you can now sell double the amount you were selling before.

Before you took out the loan you were making a gross margin of $1,500 per month on the scooters. Now that you have lowered your cost and doubled your sales, you are making $4,000 a month. At the rate you are going you will sell all of the scooters in about six months. During this time you will pay one percent per month on the $20,000, or approximately $1,200 total. You will make an additional $15,000 in gross margin for an increased expense of $1,200.

Admittedly this is a very simple example. Inventory financing is slightly more complex, but the basic fact remains: if you do not have the money to invest in building your inventory, inventory financing is one of the best ways to scale your business to much higher levels.

Let me add one final caution on this subject. Do not purchase large amounts of inventory unless you know for a fact it will sell. Don’t rely on your instincts. It can be tempting to buy products very cheaply when the product looks good to you, but you should always test market a product before committing to purchase a large quantity.

Buy Retail Store Equipment and Office Equipment at: Retail Equipment and Supplies.com

View More Articles in Equipment Financing. . .
Author: Jim Antonilli

Please Rate This Article
1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)
Loading ... Loading ...

Tags: ,

 

You may also be interested in the following Articles:

Comments

Feel free to leave a comment...

Better still write an article, express your opinion & get free backlinks to your site.

In a hurry today, just write a few words in the comment, we'd appreciate! And oh, if you want a pic to show with your comment, go get a gravatar!

You must be logged in to post a comment.

 

Visit ChiTownPost.com - A Wealthy Resource of Articles on All Subjects