Maintaining capital and cash flow when running a stock-based business can be difficult. Investment is required to obtain stock, and a balance must be made between how much stock to have available to make the business reliable for customers, and how much capital to invest in stock while still leaving enough for other business needs.
What is Warehouse Finance?
Warehouse finance is a system of asset-based lending developed to leverage a full warehouse of stock for a secured loan. It is a very specific type of business finance with several unique qualities that make it excellent for purpose.
By securing the loan in this manner, extremely competitive interest rates and high loan-to-value amounts are offered, making warehouse financing perfect for companies looking to fund expansion, purchase alternative goods, or undertake other projects while the leveraged stock is secure.
Note that warehouse finance has little to do with warehouse lending, a banking term referring to credit given by one lending institution to another.
Who is Warehouse Finance For?
While warehouse finance is typically used by medium to large businesses trading in high volumes of valuable stock. Industries that benefit from warehouse financing include:
Agriculture
Warehouse financing is often used by farmers worldwide to secure loans against large volumes of stored crops, such as grain, coffee, or cotton. In this way, the farmers can store the crops during the harvest season when market prices are low and sell them later on when the prices have risen. By using warehouse financing, valuable capital resources are not tied up for months against the stock.
Manufacturing
Raw materials such as metals, chemicals, or fabrics, can be effectively stockpiled; bought in when cheap and retained until demand has increased and values rise. With the funding provided by warehouse finance, manufacturers can take advantage of opportunities such as short-term discounts or flash sales, as well as always keeping enough stock to satisfy customers.
Commodities Trading
High-value commodity stock prices fluctuate, with political and economic world events able to rapidly alter the values of items such as oil, gold, and timber. Traders in this industry are able to hold large volumes of stock obtained when prices are low, holding on to them until they can be sold at a considerable profit - all while keeping liquid capital.
Retail / E-Commerce
E-commerce businesses and retailers who have particularly high-demand seasons with large volumes of goods movement can utilise warehouse funding to build up stock in readiness. With November and December sales often extremely high due to events such as Christmas and Black Friday, stock can be bought and stored in advance without restricting cash flow.
How Does Warehouse Financing Work?
The Physical Warehouse and Storage
One of the key components to warehouse financing is the warehouse itself. To offer the impressive low rates and high values of warehouse finance, lenders are keen to maximise the security of the housed stock, thereby minimising risk.
Physical warehouses, therefore, must be designated for the specific purpose, with trusted technology in place to track stock levels and thorough on-site security. Many lenders use approved warehouses with stock moved to these facilities as part of the financing contract.
Specialist staff, known as collateral managers inspect stock that is used to secure warehouse financing, taking control of its storage and movement. Comprehensive digital documentation is used to provide assurances for both lender and borrower regarding the safety and storage of the leveraged stock.
The Financing
Because warehouse financing has such a high level of risk assessment and security, lenders are willing to provide loans at very favourable rates, resulting in some of the most cost-effective business finance available.
Similarly, loan-to-value (LTV) size is high, often between 70% and 80% of the stock value and, in some exceptional cases of extremely high-value, easy to liquidate stock (such as gold), as much as 90%.
These impressive rates make warehouse financing a valuable product that’s worth the additional stringent conditions to which borrowers must adhere.
Repayment Structure
Warehouse financing can be structured in several ways:
- As a traditional loan, with a monthly repayment schedule.
- As a revolving credit facility, with a credit limit equal to the agreed LTV.
- As pay-as-you-sell finance, where loan repayments are directly tied to the sale of stock - borrowers repay a portion of the loan whenever stock is sold.
- As an interest-only loan, where the interest is repaid periodically, and the entire principal is due at the end of the contract.
Accessing Stock for Sale
There are two main ways to structure the access of stock:
- Full goods access - This is where the stock is accessible by the borrower to sell as needed. Careful inventory management by collateral managers is typically required. Should stock levels ever drop below the level needed to maintain the security on the loan, then replacement stock must be provided or a portion of the loan repaid to bring the LTV back down to agreed limits.
- Warehouse receipts financing - Here, the stock is passed to the warehouse collateral manager and access is denied to the borrower until the loan is repaid in full. It is called ‘warehouse receipts finance’ from the fact that the borrower retains only the receipt for the goods during the loan term. Warehouse receipts finance is often the structure needed for premium loan rates and is most commonly used in the commodities industry.
The Pros and Cons of Warehouse Financing
With its unique nature, warehouse financing has a number of advantages and disadvantages:
Pros
- Very low interest rates
- High loan-to-value asset-finance
- Extremely secure stock warehousing during contract term
- Release of equity to finance additional business needs
- Helps build a strong credit history for future funding
Cons
- Access to stock may be severely restricted
- Additional fees for storage and administration
- Large volumes of valuable stock required
- Comprehensive administration and inventory management must be in place
- Stock is at risk of repossession and third-party sale if repayment liabilities are not met
Alternatives to Warehouse Financing
Warehouse finance is one of many asset-based funding solutions that can help a business access additional capital for both cash flow and expansion purposes. Other options include:
- Stock / Inventory Finance - Most similar to warehouse financing, stock finance (or inventory finance) is another way to leverage stock for a secured business loan. Stock finance, however, offers more flexibility in exchange for weaker rates and lower LTVs. Stock used as collateral for stock finance remains under the full control of the borrowing company with less stringent levels of physical security and management, often preferable for businesses with fast-moving goods or lower-value stock.
- Building and Land Remortgages - Loans leveraged against company property in the form of commercial remortgages can offer comparable low interest rates and high LTVs to warehouse finance, often with a longer-term and easier monthly repayment obligations.
- Invoice Finance - A form of asset-based finance that utilises accounts receivable as collateral, invoice finance offers short-term funding to take advantage of business opportunities or improve cash flow.
- Asset Refinance - With a structure that’s based on the sale of equipment, vehicles or other company assets that are then leased back for continued use, asset refinance is a method of releasing equity otherwise tied up in physical assets that can provide essential capital when needed, often with favourable repayment schedules.
- Asset-Based Loans - Direct secured loans that utilise a range of company assets as collateral can provide funding with quick application and decision processing.
Apply with Clifton Private Finance
At Clifton Private Finance, our experienced business finance team can work with you to determine the very best funding options to suit your need.
Contact us today to speak to a dedicated business funding advisor and move your business forward with specialist warehouse financing.
