What is Warehouse Financing?
Warehouse financing occurs when a lender lends to a borrower who uses inventory as collateral.
How Does Warehouse Financing Work?
Let's assume Company XYZ wants to borrow $2 million to expand its operations. It has used up all of its line of credit with its regular bank, so it asks Bank XYZ for warehouse financing.
Bank XYZ agrees to lend Company XYZ the money, but it requires Company XYZ to use its inventory of widgets as collateral. Accordingly, Company XYZ moves $2 million worth of widgets to a warehouse controlled by the bank. The bank keeps close count of the widgets, and it bases the loan payments on Company XYZ's sale of the widgets over time.
Why Does Warehouse Financing Matter?
Warehouse financing allows companies to borrow money using inventory as collateral, and often on better, more flexible terms than other forms of short-term financing. In many cases, borrowers can keep the collateral inventory in their existing warehouses, and the lenders often require them to separate the collateral inventory from the rest of the inventory with a fence and signage.