An asset-based lender (ABL) looks at different types of assets in your business that can be used as collateral for a flexible financing solution. The size of the credit facility you can access—your borrowing base—will depend not only on the dollar value of your assets, but also on how well they are being managed to create profit for the company.
Each type of collateral has unique characteristics that your lender considers in deciding how much to advance. When it comes to inventory, your ABL will look at details that include, but are not limited to, its composition across different classes (raw materials, work in progress, finished goods), current turnover rates, turnover trends over time, and general management practices related to slow moving inventory and reconciliations.
Inventory Turnover Ratios—Vital Indicators
Your ABL will definitely be looking at your Inventory Turnover Ratio. This measure of how efficiently your inventory is moving can also help a lender understand some very basic and important things about your business—how effective your sales efforts are, how well you are managing your costs, and how accurately you are planning and anticipating growth in your business.
Generally, the higher the inventory turnover ratio the better, since high inventory turnover typically means that a demand exists for a company’s product and the company is selling its goods quickly. Low inventory turnover suggests weaker demand and sales, or a longer sales cycle. However, high inventory ratios could also mean a company doesn’t have enough inventory to meet demand and is losing out on sales.
A knowledgeable asset-based lender will compare your inventory turnover ratio to the appropriate benchmark in your industry to accurately evaluate your situation.
Inventory Trends Offer Predictions and Recommendations
Inventory management is very important to asset-based lenders because it’s important to your business’ success. However, there are limits to the value of simply looking at the most current inventory ratios. Your lender wants to know not only where you are today in your business cycle, but where you might be headed. To get a broader picture of your business, tracking trends in your inventory over time is useful.
Looking at your own inventory trends can also show you how you might improve your inventory efficiency. Using ratios or changes in values as a guide, you may be able to finetune your purchasing to better align with your sales.
Charting your faster movers can help you determine which popular products might provide a good platform for expanding your line and creating future growth.
If you analyze time spans shorter than a year, like quarters or even months, you gain the ability to predict seasonal highs and lows in your sales and working capital. This can help you schedule product promotions, major investments and your use of financing. It is also information your ABL can use to help customize your credit facility to fit all your needs.
How Do You Handle Slow-Moving Inventory?
Lenders know that slow-moving inventory is a fact of business. They will want to know that you have an effective plan for managing it. What responses will you make to improve the situation and improve your bottom line?
Best practices include first determining why a product isn’t moving. Is it being poorly advertised or marketed? Is there a lack of customer awareness that you offer this product? Did you order/produce too many? Or is this just a product that only appeals to a small market?
Your turnover ratios then come into play again. You are able to test potential solutions by comparing your turnover ratio before and after. Having a plan to manage negative situations maximizes your opportunities to grow your business and makes you a better candidate for financing.
Inventory Reconciliation Is a Must
If you obtain an ABL credit facility, inventory reconciliation will be part of the record-keeping requirements of your loan agreement. In fact, most asset-based lenders will perform their own test counts to validate your record keeping. If you don’t already have a process in place, it’s important to develop the steps to match your stock records with what you physically have on hand.
Because inventory is constantly in flux, it is almost inevitable that discrepancies will occur. Finding these discrepancies, correcting them and, if possible, preventing them in the future are important and can save your business both time and money.
How Important is Inventory Management to Your Future?
Since inventory is one of the top sources of collateral for asset-based financing, how you handle your inventory and how well you keep it moving is critical to how large a borrowing base you can obtain. Yes, your ABL lender needs to know what’s on your shelves, but how long it’s going to be there and how much profit it can generate are even more important.
Talk to a member of Gibraltar’s professional and experienced sales team to learn more about how inventory management can work hand and hand with asset-based financing to help your business reach its full potential.