In any business venture – regardless of its size – you want to be making your payments and making all your financial obligations with money that you actually have. That said, borrowing money for business purposes is a fact of life for many businesses, and it is not at all uncommon. However, you should also be aware that the majority of new businesses fail within the first couple of years. And excessive loans and being unable to pay them back is one of the ways that this can happen, so you must be careful.
Here we will discuss the frequent necessity of borrowing money to pay for inventory and stock. This is certainly something that can be done pretty successfully, and if you find yourself in the position of having to do so, then you should take heart that you are not alone and there are ways of doing so without getting in over your head with debt.
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Cash Flow and Inventory
If you run a physical outlet or an eCommerce site, then you are going to be working with stock which you then sell to customers or clients (either on a B2C or B2B basis). If you make more from selling the stock than you have to borrow to pay for it in the first place, then it stands to reason that taking out a loan is feasible. Nevertheless, it’s not quite as simple as that, and this is where cash flow comes in.
If you think about your total profits as reflecting how well your stock is selling, then you can think of cash flow as how much money you actually have at a specific point in time. You might make enough to cover your expenses overall, but if the money isn’t actually available when you need to make the payments, then you have a cash flow problem. fastFACTR, an established invoice factoring company, advises that borrowing to pay for stock can help your cash flow, but it can also cause cash flow problems when you need to pay it back.
Borrowing for Stock – Your Options
So, what options do you have when it comes to borrowing money for the stock? Here is a brief run-down of the major ones:
Business loans are a diverse set of financial borrowing arrangements that are, in many cases, suitable for stock borrowing. Their great advantage is that there is a range of repayment options available, and you have certain flexibility. On the downside, they are often only available to more established businesses.
Sometimes, stock needs to be purchased very quickly to account for market volatility or myriad other reasons. Less business-oriented credit facilities can be the answer, as the money requires you to jump through fewer hoops to secure. The interest, though, will be more onerous than business loans.
While business loans might require some sort of vetting and an application, they are rarely tied directly to your company’s revenue. That is where revenue-based finance comes in, as you can receive cash for a percentage of your future revenues. This can be one of the easiest loans to repay, but you might be losing more money than you anticipated if revenues increase.
At the end, which of these options is most suitable for you will depend very much on your individual business. The trick is to know your company inside out and to research each of these options thoroughly to find out the specific terms. Having to borrow money does not need to be a red flag if you apply the necessary diligence and caution.