The Cost of Financing Inventory

Inventory financing can be used where inventories are highly marketable and no threat of obsolescence exists. The inventory serves as collateral within the financing arrangement. Financing can occur up to 70% of inventory values provided that inventory prices are relatively stable. The costs of financing inventory can be very high; such as 6% over the prime lending rate.

Three types of financing arrangements for inventory are available. They are floating liens, warehouse receipts, and trust receipts. Floating liens place a lien on the overall inventory stock. Warehouse receipts give the lender an interest in your inventory. And trust receipts represent a loan which is released as you sell your inventory. The costs of financing inventory is illustrated in the following example:

You would like to finance $ 100,000 of your inventory. You need the funds for 3 months. You will use a warehouse receipt arrangement. This arrangement requires that you setup a separate area for the lender's inventory. You estimate an additional $ 2,000 in costs for storing and maintaining the inventory. The lender will advance you 80% at 16%. The costs of financing inventory is $ 5,200 as calculated below: