Warehouse Financing: Definition, Example, Vs. Warehouse Lending

What Is Warehouse Financing?

Warehouse financing is inventory financing involving a loan made by a financial institution to a company. Existing inventory is transferred to a warehouse and used as collateral for the loan. It is commonly used by smaller privately-owned firms in commodities-related businesses with limited options.

Note that warehouse financing is different from warehouse lending, where a bank provides loans without using its own capital.

Key Takeaways

• Warehouse financing allows businesses to borrow money secured by their inventories.
• Inventories used as collateral will be stored at a designated facility.
• The warehoused goods are inspected and certified by a collateral manager to ensure ownership.

Understanding Warehouse Financing

Warehouse financing is an option for small- to medium-sized retailers and wholesalers.

The collateral for a warehouse finance loan may be held in approved public warehouses or in field warehouses controlled by an independent third party.

For instance, a manufacturer of electric car batteries in need of $5 million for expansion can use its inventory as collateral through warehouse financing. The inventory is transferred to a warehouse controlled by a third party. If the loan is not paid, the bank can sell the batteries to cover it. Alternatively, the company can repay the loan and take back its batteries.

A financial institution engaged in warehouse financing designates a collateral manager who issues a warehouse receipt certifying the quantity and quality of the goods. Raw material is used as primary collateral, and additional financing can be synchronized with the build-up of inventory.

Inventory tends to depreciate, so warehouse financing may not cover the full upfront cost.

The Benefits of Warehouse Financing

Warehouse financing often offers more favorable terms than short-term working capital or unsecured loans, and repayment can be coordinated with inventory usage.

Since it is secure lending, warehouse financing is often less expensive than other types of borrowing. The lender can take and sell the pledged inventory if the borrower fails to pay. This reduces the need for legal battles to recover the loan.

Warehouse financing can improve a company’s credit rating, lower borrowing costs, and potentially secure a larger loan. This is an advantage for companies without such resources.