Warehouse Financing Explained | Nav

Many small business owners need outside help to secure cash flow and obtain the working capital they need to run their business. For many retailers and wholesalers whose businesses require large amounts of inventory, inventory financing is a great secured loan option that is inexpensive. A specialized alternative to small business loans and corporate credit cards, warehouse financing is a great opportunity to grow your business and get the funds you need to thrive.

To help you decide if inventory financing is best for your business, this article describes exactly what it is and how it works.

What is warehouse financing?

Inventory financing is a ‌credit option where manufacturers secure financing while using their raw materials and goods as collateral for the loan. These goods used as collateral are non-perishable and held in escrow held in public storage facilities approved by the lender or in an external storage facility controlled by a third party. Small to medium-sized retailers and wholesalers typically use inventory financing

The bank determines the value of the assets and then grants a loan based on that determined value. Warehouse financing is not the same as warehouse credit. Warehouse lending is a way for a bank to lend without using its own money.

Types of warehouse financing

There are many types of inventory financing options that business owners can choose from including a line of credit, term loan, mortgage loan, warehouse line, etc. Check out the ones mentioned below.

SBA 7(a)

The US Small Business Administration (USA) helps small businesses make money primarily through the SBA 7(a) program. The SBA does not fund these small business loans; it guarantees you.

The maximum you can borrow is $5 million, and the money can be used for a variety of business needs such as: B. working capital, commercial real estate, equipment or even to pay off some debts. Interest rates are low and can take anywhere from 10 to 25 years to pay back.

SBA 504

The SBA 504 Loan Program provides loans to meet real estate or fixed asset expenses. These loans feature low interest rates, low down payments, and attractive terms for business owners with good credit who qualify.

A 504 project has three key partners:

  • A Certified Development Company (CDC) provides up to 40% of the funding through a 504 note (100% guaranteed by the SBA);
  • A third-party lender provides 50% or more of the financing;
  • The borrower contributes at least 10% to the financing.

USDA Business and Industry (B&I)

The Business and Industry (B&I) Guaranteed Loan Program is a program that helps rural businesses with good credit ratings obtain the credit they need for almost any legitimate business purpose. The aim is to preserve jobs in rural America and create new ones.

These loans can be used for:

  • working capital
  • Improvement, purchase or development of commercial real estate
  • Supplies, machinery, equipment or inventory purchases
  • Integrated agricultural production or processing facilities
  • Business transformation, expansion, modernization, development or refurbishment

Commercial Bridge Loans

Commercial bridging loans are widely used by investors looking to buy commercial real estate and can be offered by various financial institutions, banks, online lenders or coin lenders (private lenders). The most important thing about commercial bridging loans is that you have to put something down as security. Usually this is the property you buy. A lender will look at the loan-to-value (LTV) ratio to find out how much the property you want to buy is worth and will loan you up to 80% of that value. You will be responsible for everything else.

How does warehouse financing work?

Inventory financing often offers borrowers better terms than short-term working capital (NWC) or unsecured loans, and the loan repayment schedule can be arranged to match inventory or materials usage.

Inventory financing is often cheaper than other ways to borrow money because it is a secured loan. Contractually, the goods in the warehouse belong to the lender. If the borrower has a repayment problem, the stock lender can take the goods and sell them in the market to get the money back. This type of loan is often cheaper than an unsecured loan because the lender doesn’t have to go to court to get their money back.

Pros and cons of warehouse financing

Here are some pros and cons of secure warehouse financing:

How can I get financing to buy a bearing?

Getting financing to buy a warehouse takes many steps, but it’s totally possible for a small business owner. Private lenders, banks, credit unions, and coin lenders accept all inventory finance applications. During the application process you may be required to submit full documentation about the property and yourself.

In order to get a lower interest rate, you must also have an appraisal done. Based on the property’s equity, borrowers who need to close their inventory loan quickly could look for loans with little or no documentation. The normal loan-to-value (LTV) range for these loans is between 55% and 65%, and the closing process can be completed in as little as two weeks. Although some lenders offer second mortgages to provide borrowers with capital that can improve the property through expansion, remodeling, landscaping, or other projects, warehouse mortgage financing usually puts the lien first. This is because a warehouse mortgage loan is considered a secured loan.

If you own or operate a warehouse, you may want to enlist the help of a commercial mortgage broker to improve your financial situation.

Best options for warehouse financing

The best loan options depend on many factors, including your business stage, equity, real estate record, and more. If the disadvantages of inventory financing outweigh the advantages or it doesn’t quite fit your business needs, other types of business financing should be strongly considered at this time. The easiest way is to sync your business with Nav’s small business loan matcher, which ensures businesses find the best financing arrangement options.

Business owners can also try to build a business line of credit by checking out Nav’s resources. If your business credit score isn’t what you want, learn how to set up a business loan.

Here are ways we recommend you get started:

  1. Register your company. Take the time to register your business in the state where you live or will conduct most of your business. Forming an LLC, S-Corp, C-Corp, or sole proprietorship can also be a powerful factor in funding your business.
  2. Open a business credit card. The best way to increase business credit is to have it, use it, and pay it on time. Nav’s business credit card resources can help you find the right card for your business.
  3. Do business with companies that report your payment history to the bureaus. This assumes that you pay consistently and on time. A good rule of thumb is to have at least 2-3 accounts with companies that report suppliers and vendors or business credit and financing.

Whatever decision you make, Nav plays a prominent role in helping you get the funding you need, when you need it.

This article was originally written on May 18, 2022.

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