Do you want to know more about stock finance? Then keep reading this article for more information.
Stock finance is a lending finance service that allows businesses to borrow capital against their goods.
Moreover, it is the asset-based finance agreement that business access funds based on the exact value of their stock from raw materials to finished products.
Also, businesses often overstock to fake the advantage of economies of scale or to prepare for periods of peak trade. However, this can tie to capital leaving the business unable to pay its accounts payable or fund growth.
Inventory loans allow businesses, retailers, wholesalers and manufacturers to lean on the stock during slow seasons of reduced revenue to boost their cash flow.
Stock finance is common among businesses that engage in international trade that can hold overseas stock or work with additional risks or delayed payment terms.
READ MORE: What is stock finance?
What Is Stock Finance?
Stock finance also known as equity, is a security that represents the ownership of a fraction of the issuing corporation.
Moreover, the units of stock are called “shares” that entitle the owner to the proportion of the corporation’s assets and profits equal to how much they have.
Stocks are bought and sold predominantly on stock exchanges and are the foundation of various individual investors’ portfolios. Also, stock trades confirm government regulations meant to protect investors from fraudulent practices.
How Does Stock Finance Work?
Businesses experiencing slower periods or payment delays but need access to liquid capital can use their stick as collateral to secure a cash loan.
Moreover, it includes all products or materials in storage that have not yet been sold. However, in the stick finance agreement, the lender will require to borrow business stock to be valued by the third party before agreeing on the exact loan amount.
This depends on the agreement; the process may be repeated on a weekly or monthly basis with businesses either opting for one-off funding or an ongoing service. Additionally, lending can continue as long as the exporter needs cash and can make repayments.
Advantages And Disadvantages of Stock Finance
With many financial services, stick finances give benefits and potential pitfalls for businesses. Here look at the pros and cons of stick finance compared with alternative financing strategies.
Advantages of Stock Finance
The potential advantages of accessing stock financing facilities are:
● New Trading Opportunities
This may not be possible for businesses that for with delayed payment terms or cannot afford to grow into territories.
● Liquid Capital
An instant case boost to avoid bad debt or fund growth.
● Manage Seasonal Demand
To allow businesses to navigate slow periods by boosting cash flow.
● Borrowing Against Owned Assets
To remove the risk associated with traditional lending, businesses only borrow against the blue of assets they own and can sell.
● Stock Management
The ongoing stick finance agreements often force businesses to re-evaluate their inventory and purchase practices to become more efficient and profitable.
● Facilitating International Trade
With the stock finance available overseas inventory.
READ MORE: Stocks: What They Are, Main Types, How They Differ From Bonds
Disadvantages of Stock Finance
Businesses must also be aware of the potential challenges that are associated with stock finance:
● Costs And Fees
This includes fees for financial services as well as potential hidden costs like having stock valued by a third party.
● Businesses May Be Ineligible
If an inventory is not valuable enough or not deemed a sellable asset by the lender.
● Stock Used as Collateral
The business borrows against its stock, meaning products can be seized if it is unable to repay.
Financial Services and Fees
Stock finance agreements have various ranges of financial services. These may include the following:
● Loans
A traditional loan agreement with the full amount paid back with interest.
● Letter of Credit
With the borrower’s bank to provide a guarantee of full and timely repayment.
● Invoice Financing
For the borrower using its accounts receivable as repayment for the loan.
The fees involved in the stock finance agreement will depend on the kind of services accessed that include its repayment structures and costs.
Am I Eligible for Stock Finance?
This is not like a traditional bank loan, sticking to finance is not designed for any or all business. Moreover, it is for a specific financial service offered to those with appropriate credentials.
To qualify for stock funding services, businesses must hold inventory, either on-site or elsewhere, that can be valued and is deemed ‘sellable” by a lender.
However, this does not include retailers that sell stock directly to consumers. This can also include manufacturers and suppliers.
Businesses also are expected to have a strong trading history and have significant funds tied up in stock. This is to reduce the risk of non-repayment to the lender through either business failure or unsold inventory.
Furthermore, those engaged in overseas trade can be eligible for stick finance as there is often no requirement for the stick to be held in the lender’s country as long as it can be verified and valued by the third party.
For businesses able to qualify for stick finance, the plan amount accessed through the service will depend on the range of factors that are:
- Whether the stock is raw materials or the finished product.
- The accessibility of the stock.
- The value of the assets is valued and verified by the third party.
READ MORE: How Does Stocking Finance Work?
Conclusion
A stock represents fractional ownership of equity in an organization. It is different from the bond, which operates like a loan made by creditors who go to the company in return for periodic payments.
