What is an inventory -based finance?

Inventory-based finance:

Inventory-based finance is one of the supply chain finance techniques and solution whereby a loan or advance is provided by the finance provider against inventory  to a seller or a buyer involved in the supply chain for the holing or warehousing of goods ( either pre-sold-unsold or hedged) and over which the finance provider exercise a measure of control by taking a security interest or assignment of rights.

Inventory-based finance can be regarded as a pre-shipment finance ( where the client is the seller), or as a post-shipment finance ( where the client is the buyer).

Inventory based finance can be provided in different forms, like:

• Asset-based lending : a borrowing base is created whereby the maximum level of finance is made available against a calculated market value of the goods being financed, less a margin which will vary according to the nature and salability of the goods.
• True sale : in which the inventory is removed from the original inventory's owner's balance sheet and in which the financier inters into a retention of title agreement for the goods being financed.
• Floor plan finance : a manufacturer places ready stocks in the hands of a distributor or a dealer with funding provided by the finance provider.

When do we use inventory-based finance :

In practice, inventory-based finance is used to finance goods that are in a condition whereby they are ready to be sold as finished goods or commodities.

Inventory is created when goods are:

• Being converted into finished goods by a manufactures in the factory.
• In transit prior to being sold to end-buyers
• Pending the sale for goods for a retailer

The finance provider takes the below into consideration when contemplating a provision of inventory finance:

the nature of the goods : has a material impact on the reliability of the source of repayment

Finished goods : the finance provider will accept goods that are sealable, energic and readily to be sold to end-buyers . Also, a finance provider may be happy with the goods that are presold and may be happy with a percentage of unsold goods called ( buffer stock) if they are generic goods and can be sold readily to end-buyers. In addition the finance provider may be ready to finance the entire unsold goods, in case such goods are of a generic quality and can be sold smoothly and quickly to end-buyers.