One of the biggest challenges of running a business is access to enough funds to buy inventory. Car dealers usually apply for inventory financing for vehicles. This allows them to buy more vehicles to sell or keep up with customer demand. Car dealerships operate in a competitive industry. Business owners need all the help they can get to keep their company afloat.
Inventory financing provides car dealerships with the funds needed to purchase inventory. Most auto dealerships have most of their capital tied to the vehicles they sell. Applying for inventory financing gives you additional capital to work with.
Like other types of business financing, inventory financing has its advantages and disadvantages. It’s important to weigh your options before applying for inventory financing.
PROS
Here are some of the benefits of inventory financing for auto dealerships:
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It Keeps Your Shelves Full
Car dealerships can use inventory financing to replenish their stocks. If you’re running low on stocks, you must replace those immediately to meet demand. Running low on inventory will affect your bottom line.
With an inventory loan, you can have your units delivered even before your stocks runs out. This ensures that you’ll have enough in store to cater to the demands of your customers. With sufficient inventory, you’ll be able to increase sales and keep your business moving forward.
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Let’s You Invest in Better Inventory Management Software
Inventory financing also allows businesses to invest in better inventory management tools. Having the right tools in place, tracking inventory becomes easier for business owners. A better inventory management system will also help avoid costly mistakes. In this way, you can properly track your finances.
Upgrading your inventory management system can be expensive. But inventory financing can help you get the funds you need for the big upgrade. Be sure to try different inventory management software before you commit to one.
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Prepare for the Peak Season
Auto dealerships are usually at their busiest during September to November. Before peak season begins, you need to buy the necessary inventory. But many companies may not have enough cash to cover the cost for inventory. For this reason, many companies use inventory business loans to bridge the gap. With the funds, the dealership can get the inventory needed to prepare for the busy season.
CONS
As the name suggests, inventory financing can only be used to finance inventory. With that, it may not be suitable for all businesses. Here are the cons of inventory financing:
ry financing is only used for purchasing inventory (i.e. vehicles or car parts for car dealerships). While it may allow you to free up cash tied up on inventory, there are restrictions on how you can use it. For instance, you can’t use it to pay for your employee’s payroll or pay business taxes. This makes inventory financing less flexible compared to other loan options.
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It’s Meant to Fund Short-Term Needs
Generally, inventory loans have a repayment period of 6 to 12 months. But the repayment period depends on the turn-over rate of the inventory. Inventory loans aren’t the best choice if you’re looking for a long-term funding solution.
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Higher Interest Rates
Lenders usually find inventory loans riskier than other financing options. In inventory loans, the borrowers only pledge their inventories, not their personal assets. With this arrangement, the lenders are facing a bigger risk. They try to offset the risk by charging higher interest rates.
A lot of business owners often don’t go through with their application. The interest rate and other fees can create a big gap in their cash flow. However, stronger borrowers usually get more favourable terms. If you have a good payment history, strong credit score and financial history, you may qualify for better terms and rates.
Is Inventory Financing for Vehicles The Best Choice for Your Dealership?
Running a car dealership business is expensive. Business owners have to come up with a large sum to reorder stocks. Considering how much vehicles cost, financing it out of their pocket can create a big cash flow issue. Funds from inventory loans provide them with enough funds to buy the vehicles.
Before you apply, be sure to consider the pros and cons of inventory financing for vehicles. There are a lot of instances where businesses end up closing because they can’t afford repayments. Be sure to look for a lending company that offers the terms best suited to the needs of your company.
