Warehouse Financing Explained | Navigation

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Many small business owners need outside support to secure their cash flow and get the working capital they need to run their business. For many retailers and wholesalers whose businesses require them to maintain a large amount of inventory, warehouse financing is an excellent secured loan option that is cost effective. A specialized alternative to small business loans and business credit cards, warehouse financing is a great opportunity to expand your business and get the funds you need to succeed.

To help you decide if warehouse financing is best for your business, this article details exactly what it is and how it works.

What is warehouse financing?

Warehouse financing is a lending option where manufacturers obtain financing while using their raw materials and merchandise as collateral for the loan. These assets used as collateral are non-perishable and are held in a trust, which presents itself as being housed in public warehouses approved by the lender or in a land warehouse controlled by a third party. Small and medium retailers and wholesalers typically use warehouse financing

The bank will determine the value of the assets and then issue a loan based on that designated value. Warehouse financing is not the same as warehouse loan. Warehouse loan is a way for a bank to make loans without using its own money.

Types of Warehouse Financing

There are many types of warehouse financing options that business owners can choose from, including a line of credit, term loan, mortgage, warehouse line, and more. Check out the ones mentioned below.

LS 7(a)

The primary way the US Small Business Administration (USA) helps small businesses get money is through the SBA 7(a) program. The SBA does not fund these small business loans; he guarantees them.

The maximum you can borrow is $5 million, and the money can be used for a wide range of business needs, like working capital, commercial real estate, equipment, or even to pay off certain debts. Interest rates are low and repayment can take 10 to 25 years.

SBA 504

The SBA 504 loan program offers loans to help cover the cost of real estate or fixed assets. These loans come with low interest rates, low down payments and attractive terms for business owners with strong credit ratings who qualify.

A 504 project has three key partners:

  • A certified development company (CDC) provides up to 40% of the financing through a 504 debenture (100% guaranteed by the SBA);
  • A third-party lender provides 50% or more of the financing;
  • The borrower provides at least 10% of the financing.

USDA Business and Industry (B&I)

The Business and Industry (B&I) Guaranteed Loan Program is a program that helps rural businesses with good credit get the credit they need for almost any legal business purpose. The goal is to keep jobs in rural America and create new ones.

These loans can be used for:

  • Working capital
  • Commercial real estate improvement, purchase or development
  • Purchases of supplies, machinery, equipment or inventory
  • Integrated agricultural production or processing facilities
  • Reconversion, enlargement, modernization, development or repair of a business

Commercial bridging loans

Commercial bridge loans are often used by investors looking to buy commercial property and can be offered by various financial institutions, banks, online lenders or hard money lenders (private lenders). The most important thing about commercial bridging loans is that you have to provide something as collateral. Usually this is the property you are buying. A lender will look at the loan-to-value (LTV) ratio to determine the value of the property you want to buy and lend you up to 80% of that value. You will be in charge of everything else.

How does warehouse financing work?

Warehouse financing often offers borrowers better terms than short-term working capital (NWC) or unsecured loans, and the loan repayment schedule can be set to match how inventory or materials are used.

Warehouse financing is often cheaper than other ways to borrow money because it is a secured loan. Contractually, the goods in the warehouse belong to the lender. If the borrower has a problem with the repayment, the warehouse lender can take the goods and sell them in the market to recover the money. This type of loan is often cheaper than an unsecured loan because the lender does not have to fight long in court to get their money back.

Advantages and disadvantages of warehouse financing

Here are some pros and cons of getting warehouse financing:

How can I get financing to buy a warehouse?

Securing financing to purchase a warehouse requires many steps, but is entirely possible for small business owners. Private lenders, banks, credit unions, and hard money lenders will all accept applications for warehouse financing. Throughout the application process, you may be required to submit full documentation of the property and yourself.

In addition, to benefit from a lower interest rate, you will need to have an appraisal done. Based on the equity in the property, borrowers who need their warehouse loan closed quickly could apply for loans with little or no documentation. The normal loan-to-value (LTV) range for these loans is between 55-65%, and the closing process can be completed in as little as two weeks. Although some lenders offer second mortgages as a way for borrowers to obtain capital that can improve the property through expansion, renovation, landscaping or other projects, warehouse mortgage financing takes generally the privilege of first position. This is because warehouse mortgage financing is considered a secured loan.

If you own or operate a warehouse, you may want to seek the help of a commercial mortgage broker to improve your financial situation.

Best Warehouse Financing Options

The best loan options depend on many factors, including the stage of your business, your own capital, your real estate history, and more. If the disadvantages of warehouse financing outweigh the advantages, or if it doesn’t quite meet the stage of your business needs, there are currently other types of business financing to seriously consider. The easiest option is to sync your business with Nav’s Small Business Loan Matching Tool, which ensures businesses find the best financing options.

Business owners can also look into creating a business line of credit by visiting Nav’s resources. If your business credit score isn’t what you want it to be, learn how to establish business credit.

Here ‌we suggest you start:

  1. Register your business. Take the time to register your business with the state in which you live or will conduct the bulk of your business. Forming an LLC, S-corp, C-corp, or sole proprietorship can also be a determining factor in which financing your business is eligible for.
  2. Open a business credit card. The best way to increase business credit is to have it, use it, and pay on time. Nav’s business credit card resources will help you find the right card for your business.
  3. Do business with companies that report your payment history to the bureaus. This requires you to pay regularly and on time. A good rule of thumb is to have at least 2-3 accounts with businesses that claim to include vendors and vendors or business loans and finance.

Whichever choice you decide to make, Nav plays a leading role in helping you get the financing you need when you need it.

This article was originally written on May 18, 2022.

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