How SMBs Can Fund Growth Through Inventory Finance

Cash is king, they say, and working capital is critical in seeing firms through the pandemic – and beyond. And while PPP and government packages are helping, they’re not long-term fixes that provide that financial lifeline that’s so often needed.

Change is needed — and that was the lead topic in a conversation between PYMNTS and Cesar Silva, vice president of business development at Iron Horse Credit. Silva believes smaller firms can tap into their tangible assets to secure the money they need to capitalize on growth opportunities. Iron Horse addressed the issue via an announcement last month that launched an inventory-backed revolving line of credit program.

The company said in a release that the program would help small to mid-sized businesses (SMBs) with top lines of at least $5 million to gain access to additional working capital that is, as the program’s name implies, collateralized by the firms’ inventory. The lines of credit can range from $500,000 to $15 million, and in turn, can represent borrowings of up to 65 percent of the cost of the inventory itself.

PPP and government packages are not long-term fixes, as they provide working capital for only a couple of months. As Silva explained, inventory can provide a key source of capital – but it’s a conduit that largely remains untapped. Of these smaller SMBS, he said, “they’re not really utilizing the inventory as a primary source of collateral, which can hinder the ability of different companies to obtain additional capital.”

Iron Horse has found the opportunity to get comfortable with using inventory as an asset class, demonstrating a willingness to lend against those goods in a way that banks and other lenders may eschew, which provides additional working capital to these under-served firms. There remains a significant opportunity to reach out to these companies and make them aware that other financing options are available.

“We have a niche in the way that we underwrite our transactions,” Silva said of the inventory-backed lines of credit, which he emphasized are not term loans, but are standalone revolvers that can move up or down as inventory increases and decreases.

Traditional lenders and banks may be reluctant to lend against inventory, he explained, because they view it as an illiquid inventory class. Traditional lenders tend to look toward accounts receivable (AR) as a determinant of lending or the cash on the borrowing firm’s balance sheet.

Many lenders, he continued, will lend against inventory as an adjacent part of the business – or if they do lend against inventory, the ratios are relatively lower (read: more conservative) than might be seen with a firm like Iron Horse – which means the borrowing enterprise gets less money for its asset base. As Silva told PYMNTS, “we actually partner with AR lenders, where we provide a complementary facility to the current relationship.”

COVID Urgency

The urgency is there, in the age of COVID, for companies to tap new sources of financing. Silva noted that firms, especially in the consumer goods space, need to carry more inventory to satisfy demand (from consumers or vendors, in the case of B2B) that crosses eCommerce channels.

In other cases, companies took a hit to sales in the midst of the pandemic (which reduces AR). In that case, inventory is on hand (though sales and the attendant AR may not be) that can be collateralized. Silva told PYMNTS that Iron Horse has been working with companies tied to fulfillment through Amazon – the inventory is held by Amazon, and Iron Horse can tap into the Fulfillment by Amazon portal to monitor and track inventory that is being collateralized.

Iron Horse has deals not just with direct-to-consumer SMBs, but also with clients selling across B2B channels.  The company has also been forging partnerships.

“We have partnered with different AR lenders and other working capital solution providers to maximize access to capital for all of our clients,” Silva told PYMNTS. “We always consider it as the bridge finance solution to get from point A to point B.”