What Is Commodity-based Inventory Financing?

Key Points to Know

• What It Is: Inventory financing provides businesses with funds to purchase or secure inventory they plan to sell later.

• How It Works: The loan or financing mechanism is secured by the inventory purchased with the funds.

• Who Uses It: It’s commonly utilized by businesses of various sizes that need financing options other than factoring, unsecured credit lines or loans back by other tangible assets.

• Why It’s Useful: It helps maintain steady cash flow, increase inventory availability and hence and meet customer demand and grow sales.

• Potential Challenges: legal mechanisms for securing the inventory require additional paperwork and operational overhead.

How Does Inventory Financing Work?
Commodity inventory financing is typically done using an asset-backed loan or repurchase (widely known as REPO) agreements:

• Asset-backed loans are instruments where the lender provides a loan to the borrower and the loan is legally secured by legally encumbering or assigning a certain asset(s) to the borrower.

• REPO (repurchase) agreements are instruments, where the lender legally buys the asset from the borrower and then sells the asset at the purchase price + interest back to the borrower. REPO orders are widely used in commodity trade, because using REPO agreement commodity ownership can be easily transferred to the lender and back to the borrower, while security of the underlying commodity can be ensure using third party warehousing facilities or shipping (such as Bill of Lading) documents.

DeRISK inventory financing facility utilizes REPO orders which enables us to help finance commodity trade globally and efficiently regardless of the size of the required financing, location of the asset or the commodity type.

Key benefits of Commodity Inventory Financing

Using inventory financing can benefit businesses in several ways:

• Lower requirements for Credit History: Businesses can qualify without relying on their credit ratings or financial history.

• Increased Sales: Access to financing allows companies to sell more products over time.

• Support for new businesses or business models which are asset light. Financing backed by commodity inventory can easier to obtain by new companies, or companies that do not have other tangible assets for collateral that typically banks require.

Advantages of Commodity Inventory Financing over other instruments

• Tailored Financial Solutions: Financing structures are customized to fit the specific needs of businesses across the commodity value chain, from producers to traders and end-users. For example, a commodity held in overseas location, where the company does not have permanent operations be financed using a REPO transaction and secured using third-party warehouse operator. This typically would be impossible with local commercial banks.

• Mitigation of Market Volatility Risks: Structured trade finance can include risk management strategies like hedging, helping businesses navigate price fluctuations in commodity markets effectively.

• Preservation of Cash Flow and flexibility: Businesses can maintain liquidity levels as needed due to the revolving nature of the financial mechanism.

The Bottom Line
Inventory financing is a practical way for businesses to secure cash by using inventory as collateral. It can help cover day-to-day operations, meet seasonal demands, and increase product availability. However, businesses should carefully consider the associated costs, interest rates, and repayment terms to ensure it aligns with their financial goals.