Why Inventory Financing Could Be Crucial For US Importers’ Post-Crisis Recovery



Pushkar Mukewar | Forbes Finance Council

The Covid-19 pandemic has not only caused human and economic suffering at an unprecedented scale; it has also starkly revealed the fragility and interwoven nature of the global economy. Successive lockdowns by various nations to control the spread of Covid-19 severely impacted global trade in the first half of 2020. During the lockdowns, many consumer-facing businesses found themselves facing an uncertain future as demand plummeted.

However, as markets have gradually opened up in major consumer centers like the U.S. in recent months, demand is slowly beginning to return. In fact, the Census Bureau’s Advance Monthly Retail Trade Report for June indicated that American shoppers had returned to retailers with vigor in May and June. This newfound enthusiasm did not seem to last very long, though, and media reports from early July confirmed what the U.S. retail sector has feared: The pandemic has made many Americans fearful of large, enclosed retail spaces.

However, at the same time that traditional brick-and-mortar retailers are scrambling to come to terms with their new economic reality, e-commerce sales have soared to new heights. As more companies look to build their online markets in earnest, they are going to increasingly face challenges with procurement of inventory and supply to keep pace with rising demand. While the local U.S. supply chain recovers gradually from the pandemic, much of this demand will continue to be met from overseas shipments, and this poses an opportunity for intrepid importers and other members of the supply chain in the U.S. import market.

Changing Global Order

U.S. government data shows that the country’s trade deficit in May rose for the third straight month, increasing 9.7% to $54.6 billion. While overall American imports decreased 0.9% to $199.1 billion month on month, their lowest total since July 2010, imports of key consumer-facing segments rose substantially, including foods, feeds and beverages ($35 million), industrial supplies and materials ($2.3 billion), and consumer goods ($1.9 billion). This indicates a resurgence in consumer demand, one that will continue to be met primarily, in the short-to-medium term at least, by imports.

As demand starts surging, importers, especially small and medium-sized businesses (SMBs), are likely to find it difficult to procure fresh inventory to fulfill orders, particularly given the rise in aversion to China, a key global supplier. Despite increasingly aggressive trade rhetoric between the two countries, U.S. imports from China still increased $2.7 billion to $37.9 billion in May, almost 23% of all American imports. Finding alternatives for this volume of trade will be an arduous undertaking.

It’s also likely to be a suppliers’ market in the coming weeks as a lot of backed-up supply in other markets like India and Vietnam gets released into global trade. Media reports from these countries indicate that exports of essential goods, such as agricultural commodities, foodstuffs and pharmaceuticals (which form major components of the export basket in these nations) have continued to rise in recent months despite the lockdown, and are set to maintain their upward trend. Additionally, while the exports of more discretionary goods (such as apparel and consumer electronics) from these nations slowed down under their lockdowns, American consumer demand for these categories appears to have risen, indicating that recovery for these sectors may be in the cards sooner rather than later. With local manufacturing in these markets rapidly pushing for a return to normalcy, U.S. importers can likely anticipate a rise in supply, weakening their bargaining power in a market dominated by steady supply and spikes in consumer demand.

(Inventory) Financing American Recovery

Because of the above reasons, U.S. importers may find themselves at a disadvantage when negotiating terms with suppliers, and this could have a negative impact on their finances. However, they can leverage an alternative solution to meet their working capital requirements and forestall any fiscal gaps: inventory financing.

At its core, inventory financing is a form of credit available to businesses by selling goods and products they already have but do not need to sell immediately. By collateralizing their existing inventory, businesses can get access to working capital in hand that they can then use to grow their business.

SMB importers approaching inventory financing should keep in mind the following:

1. Inventory financing is aimed almost exclusively at businesses in the product/merchandise trade space — i.e., businesses with physical inventory. For SMBs in the service sector, inventory financing is unlikely to be of any help.

2. Most lenders will check prior sales performance of businesses to check their viability for inventory finance. Having a strong sales record can help establish credibility, particularly because SMB importers often have poor credit scores, too.

3. Like other alternative finance options, inventory finance is meant to be an add-on or supplement that SMBs can leverage to access working capital in an emergency. Relying on it as a primary source of finance for the business can lead to slower-than-expected growth, because most lenders are unable to provide finance beyond certain limits.

4. Particularly in the wake of Covid-19, broken supply chains could sometimes mean that inventory spends a long time in storage before being shipped to consumers. SMBs may not always be able to manage this stored inventory properly. In such a case, opting for add-on warehouse management offerings provided by many inventory financiers may be a good idea. It costs extra, but offers the assurance that the inventory is taken care of. 

By leveraging their existing inventory through third-party inventory financing, U.S. importers can access cash they need to place fresh orders and meet demand from their consumers. Additionally, warehouse management offerings rolled into certain key supply chain finance packages also assist in reducing logistics overheads for SMBs and free up additional cash reserves. This could be a crucial factor toward helping SMB importers in the U.S. not only recover from the economic slowdown after the pandemic, but also set themselves up for growth in the months to come.

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