Inventory financing: solutions to optimize your cash flow

What exactly is stock financing?

Inventory financing is a financing method that enables a company to finance its inventory purchases .

He can therefore intervene in various contexts such as :

• Rising demand

• Forecasting a seasonal peak

• Take advantage of attractive supplier discounts

What type of company is concerned?

Stock financing generally involves companies whose growth and competitiveness depend on stock purchases .

Different company profiles are involved:

• Companies involved in the retail trade such as supermarkets, clothing stores, etc.

• E-commerce companies (Amazon or Shopify stores, dropshipping companies, etc.)

• Industries and manufacturers requiring raw materials etc.

Overdraft facility

This is an authorization offered by a bank to exceed your bank account balance for a specific period of time .

In other words, it's all about a form of short-term loan which enables a company to access funds rapidly without having to go through cumbersome formalities.

The maximum amount is defined in advance according to the company's needs and financial situation. It can be used in full or in part. The interest rate applied is calculated according to the amount actually used.

Its advantages:

• Ideal for temporary cash needs

• No formalities, so you save time

Disadvantages:

• High cost compared with conventional bank loans

• Dependency risk

Bank credit

These are funds granted by a financial institution to enable a company to cover cash flow or investment needs . It can be used to finance inventories.

It can be short, medium or long term. The interest rate and the amount granted by the bank depend on the repayment period.

Advantages:

• Flexible upright . Depending on the company's ability to repay the loan, it may ask for larger or smaller sums.

• Repayment terms can be adapted to the company's sales cycles

Disadvantages:

• A longer application procedure because, unlike overdraft facilities, for example, it requires an analysis of the application file.

• Inventory impairment risk . In this case, repayment of the loan may be more complicated for the company.

Supplier credit

Unlike the other solutions on our list, here the parties do not involve any intermediaries.

It is the supplier who grants the company payment terms for inventory purchases.

Its advantages:

• No direct costs . There are no interest rates or penalties as with bank credit, for example. However, the supplier may apply penalties for late payment.

• Possibility of early repayment discount

• Improved cash flow for the company, which can avoid a deterioration in WCR

Disadvantages:

• Dependence on one supplier which can reduce the company's negotiating power

• Impact on corporate reputation repeated late payments

Factoring

Factoring is a financing method that enables a company to sell your receivables to a specialized organization .

It's a way of liquidating receivables without having to wait for predetermined deadlines, and freeing up funds to finance inventory purchases.

Hero offers this type of service by advancing the payment of your customer invoices. In this way, you avoid the potential adverse effects of late payment.

Advantages:

• Immediate improvement in company cash flow that doesn't have to wait for payment deadlines

• Easy access . Factoring companies are generally less demanding in terms of guarantees than banks. At Hero, for example, funds are released the very next day, without the need for cumbersome formalities.

Disadvantages:

• High cost . Factoring costs can be significant.

• Potential impact on customer relations if the factor mismanages collection

Le revenue based financing

Translated into French as revenue-based financing, this is a financing method that allows a company to receive funds in exchange for a percentage of future profits .

It's a financing mechanism tailored to companies that generate recurring revenues.

Hero also offers revenue-based financing. The platform can advance your inventory purchases .

You can then repay it and benefit from two types of payment facility: deferred payment after 60 to 90 days or payment in 3 or 4 instalments.

Advantages:

• Quick to set up . In the case of Hero, for example, you don't need to go through any complicated formalities to purchase stock via the platform.

• Practical. Hero is only a payment platform. The supplier is not informed of the cash advance transaction.

Disadvantages:

• Short repayment terms . The RBF is suitable for temporary financing needs. Repayment is between 6 and 24 months . On Hero, this period is even shorter, between 60 and 90 days.

• An impact on cash flow because repayments are based on les ventes . A portion of future income will be used to repay the "loan".

How to combine financing solutions?

Mixing different financing solutions is an approach that allows you to diversify your sources of stock financing and thus reduce dependence on a single source.

However, not all the sources we have cited are compatible with each other.

Here are our tips for combining stock financing sources:

• Evaluate and compare the costs of different financing solutions . In particular, analyze management fees and interest. Mixing different solutions should enable you to optimize costs.

• Plan the use of different solutions to avoid reimbursement overloads

• Maintain good relations with your suppliers and lenders to ensure favourable negotiating conditions

• Adapting to company life cycles . FBR and supplier credits are best suited to a start-up company. A growing company can use RBF, factoring and bank credit. For a mature company, bank credit is the most suitable solution, as it has the means to offer guarantees to obtain large sums of money.

When choosing which solutions to combine, it's important to take into account the company's specific characteristics, financial constraints and seasonality.

Here are some examples:

• Supplier credit + factoring for companies with long payment terms and large customer receivables . Payment terms granted by suppliers are used to purchase inventory without using up cash. Factoring then provides the liquidity to repay suppliers on time.

• Bank credit + Revenue-based financing for companies with recurring and predictable revenues . Bank credit is used to finance the purchase of large quantities of stock. RBF is then used to finance marketing campaigns and sales cycles to accelerate stock rotation.

How much does it cost to finance stock?

Costs vary according to the financing solution(s) chosen:

• Supplier credit. It's often a free solution, provided you meet the payment deadlines set by the supplier. It may even enable you to benefit from early payment discounts.

• Bank credit. Interest rates depend on the amount borrowed and the repayment period. Guarantees, insurance and administration fees are also required.

• Affacturage . A management fee and a commission are charged by the factor, depending on the amount of receivables and the repayment period. The cost of the operation ranges from 0.1% to 2% of the amount of the invoice transferred.

• Easy checkout . Its interest rate is higher than those applied to bank loans, because it is quick and easy to set up.

• Revenue-based financing . Its cost ranges from 4% to 10% of the amount granted.

Hero finance votre stock

Hero is a payment solution for very small businesses looking for inventory financing solutions.

We offer two solutions:

• Factoring . We advance payment of your receivables.

• Le RBF. We advance payment of your supplier purchases. We then offer you two attractive repayment options: deferred payment after 60 to 90 days, or payment in 3 or 4 instalments.

In a nutshell, inventory financing solutions are many and varied. Simply choose the one that best suits your company's needs and characteristics. You can also combine two solutions to optimize costs and avoid dependence on a single source of financing. With Hero, you can combine factoring and revenue-base financing to finance your inventory purchases without jeopardizing your WCR.