Types of Inventory Financing There are several different types of loan arrangements that involve

Types of Inventory Financing There are several different types of loan arrangements that involve

inventory as collateral. These arrangements differ in terms of the con- trol that the lender has over the location and disposition of the inven- tory.

A floating lien is the most flexible type of inventory loan. A floating lien gives the lender a lien on all inventory of the borrower—that is, all inventory is security for the loan. Therefore the security of the loan changes as the borrower buys and sells inventory.

A chattel mortgage is a loan secured by specified inventory. In other words, inventory items are uniquely identified, such as by serial number, as collateral for the loan. The borrower retains title of the inventory. And although the borrower still owns the inventory, she or he cannot sell it unless the lender gives permission. This type of loan is best suited for inventory that consists of large, slow moving items.

In a trust receipts loan, the borrower holds the inventory in trust for the lender. As the inventory is sold, the borrower keeps the proceeds in trust for the lender. This type of arrangement is also referred to as floor planning and is used often with auto dealerships. First, the bor- rower arranges a loan with the finance company. The borrower then orders and receives the inventory, with the finance company paying the supplier. As the borrower sells the inventory items, the borrower remits the payments to the finance company, reducing the amount of the loan. Because the finance company is counting on the borrower to maintain the inventory (keep it in good condition) and send the payments when sales are made, the lender must devise a way to monitor the borrower.

In a field warehouse loan the lender has tighter control over the inventory. The collateral (the inventory) is kept in a separate, secured area within the borrower’s premises and is monitored by a field ware- house agent. This agent keeps control over the inventory in this area

Management of Short-Term Financing

and issues receipts to the lender, indicating the existence of the inven- tory. As the lender receives these receipts, she makes a loan based on the collateral value of the inventory. This arrangement is more expensive than the floating lien, chattel mortgage, and trust receipts arrangements because a third party—the field warehouser—must be compensated for his services. This arrangement offers the lender more peace of mind over the inventory.

Even tighter control over collateral inventory is maintained in a public warehouse loan arrangement. In a public warehouse loan, collat- eral inventory is kept in a secured area away from the borrower’s pre- mises, such as in a public warehouse, and is only released to the borrower if the lender gives permission. The warehouser issues to the lender receipts (similar to the field warehouse arrangement) from which the lender acknowledges in the form of money loaned to the borrower. In this arrangement, the lender has title to the goods instead of the bor- rower.