Financial institutions consider short-term loans to contain less risk when compared to long-term loans because the amount of time it takes to pay back the principal to the lender is shorter. Accounts receivable and real estate are preferred over inventory when given a choice regarding short-term loan collateral. The duration of the loans can vary from 3-4 months to 1-3 years. Although most short-term loans are based on credit scores, those businesses that own the minimum quantity and types of asset requirements can utilize inventory as collateral. Once the designated items are sold to a third party by the borrower, the lender expects immediate payment. The three methods that inventory is leveraged allow borrowers to obtain lower fixed interest rates and terms. It should be noted that this form of financing differs from a line of credit because when the duration of the contract expires, a business cannot obtain more funds. One reason firms may wish to go this route is that it may need to pay suppliers before they actually sell the items in stock. Another common reason is that different fiscal quarters may traditionally yield more revenue, and using the inventory loan to purchase more items for stocking leads to more revenue during that period when sales are expected to increase.
The floating inventory lien is also called a blanket loan and places a claim on large quantities of low-cost items. About half of the value of the total items is granted and the interest rate is 3%-5% higher than present prime rats. The term floating means that inventory that will be obtained by the borrower in the future is also covered under the terms. Since the entire stock is covered, there is no ambiguity regarding what to include when collecting. The trust receipt inventory loan is useful for placing a claim against costly consumer goods. It is commonly employed by auto dealerships and the like that seek to obtain 100% of the cost of a vehicle from a manufacturers financing division (captive finance companies). When a vehicle is sold, the dealership pays back the amount borrowed and retains any dollar amount (minus expenses and taxes) negotiated with the buyer above the price obtained from the financer. Because every item has a serial number, it is relatively simple to keep track of the entire inventory. Commercial banks and companies also provide this type of loan. With the warehouse receipt loan the lender is granted physical control over items that are neither perishable nor specialized, and are difficult to identify. The inventory is fenced off when stored on a site supervised by the borrower or securely locked in a public warehouse when supervised by a third party. A written notice is clearly posted for all to see that communicates the items are reserved as part of a warehouse financing agreement. The security guards responsible for overseeing the area receive orders from either the lender or a third party (such as a public warehouse company). For the short-term requirements, My Green Loans makes getting a loan easy for the applicants. The information from the contracts should be gathered with intelligence to get the right results. The furnishing of the information should be correct and accurate to meet with the financial situation without good credit score.
In most cases the floating inventory lien is probably the most risky of the three options due to the difficulty of pinpointing the exact composition and quantity of inventory onsite at any one point in time. The premise of the loan is based on an accounting estimate of less than 50 percent of the book value of the average inventory. If there is a need to sell the items upon a default by the borrower, the lender may find the actual makeup of property to be significantly different than originally expected.
