Long lead times and component shortages force high-tech suppliers to purchase earlier, requiring a suitable financing structure.
High-tech suppliers in the Eindhoven region face a tricky combination: customers expect rapid delivery times, while critical components sometimes need to be ordered months in advance. This means you tie up capital in stock long before you can invoice that stock to your customer.
Inventory finance is specifically designed to bridge that gap. In this article, we explain how this financing method works, when it is a logical choice, and what to look out for when assessing an offer.
What inventory finance actually is
With inventory finance, a lender provides credit secured against your stock. This allows you to make purchases without having to fund them entirely from your own working capital. Once the stock is processed and sold, you repay the facility, often linked directly to the sales invoice.
This differs from a standard loan because the financing is directly linked to your stock turnover rate, rather than running on a fixed repayment term like an investment loan.
Why this is relevant for high-tech suppliers
In the high-tech supply chain around Brainport, many companies work with specialised components that are not readily available off the shelf. Component shortages, which have been a recurring theme in the semiconductor supply chain in recent years, force buyers to order earlier and in larger volumes than was previously customary.
This significantly stretches the period between purchasing and sales, and consequently the time capital remains tied up. For a supplier manufacturing machine parts for the semiconductor industry, this can mean critical components must be ordered and paid for six to nine months prior to delivery to the end customer.
Criteria lenders look at
- Marketability of the stock: how easily it can be sold to others in the event of default
- Valuation method: cost price or appraised market value
- Degree of perishability or technological obsolescence
- Quality of your stock records and periodic stocktakes
- Existing collateral already pledged to other financiers
- Concentration of stock with one or just a few suppliers
Worked example: estimating financing requirements
Suppose you order critical components for € 300,000 that must be paid seven months before delivery to your end client. Without stock financing, you tie up this amount for seven months using your own funds or your overdraft facility.
With stock financing at, say, an advance rate of 70 per cent of the purchase value, you finance € 210,000 via the stock facility and only need to fund € 90,000 yourself. That significantly relieves pressure on the rest of your working capital, although you naturally pay interest and fees on the financed amount throughout the term.
Combining with other forms of finance
Stock financing rarely stands on its own. Many suppliers combine it with invoice factoring for outgoing invoices and an overdraft facility for day-to-day flexibility. This covers the entire cycle: from purchasing components right through to payment by the end client.
When combining financing facilities, pay close attention to overlapping security. A financier accepting stock as collateral typically requires certainty that the same inventory has not already been pledged to another party.
When it is not the right choice
Stock financing is less suitable if your inventory depreciates rapidly, becomes obsolete quickly in technological terms, or is difficult to liquidate via sales to third parties. In that case, a financier will offer a low advance rate or reject the application, and a standard working capital solution or growth finance may be more appropriate.
What to do next
Map out what portion of your working capital is tied up in pre-ordered stock and for how long. Determine whether your inventory is sufficiently liquid to serve as collateral, and check with a financier what advance rate is realistic for your type of components. You can also visit our page on working capital and equipment lease for adjacent solutions, or use the financing calculator for an initial estimate.
Frequently asked questions
- What is the difference between stock financing and a standard business loan?
- Stock financing is directly linked to your inventory turnover rate and is repaid as soon as the stock is sold, whereas a standard loan features a fixed term and repayment schedule, independent of your stock cycle.
- What proportion of the purchase value is financed?
- That varies by financier and by type of stock, depending on how marketable and stable in value the goods are. Always ask for specific terms, as this directly determines how much capital you must contribute yourself.
- Can I combine stock financing with factoring?
- Yes, this is common practice, provided the security rights are clearly demarcated between the financiers so that the same stock or invoices are not pledged twice.