Many small business owners need outside support to help secure cash flow and get the working capital they need to run their businesses. For many retailers and wholesalers whose businesses require them to maintain a bulk of inventory, warehouse financing is a great 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 operations 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 secure funding while using their raw materials and goods as collateral for the loan. These goods used as collateral are non-perishable and are held in a trust, which comes as being housed in public warehouses approved by the lender or an in-field warehouse facility controlled by a third party. Small to medium-sized retailers and wholesalers typically use warehouse financing

The bank will determine the value of the assets and then extend a loan based on this designated value. Warehouse financing is not the same as warehouse lending. Warehouse lending 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 for business owners to choose from, including a line of credit, term loan, mortgage loan, warehouse line, etc. Check out the ones mentioned below.

SBA 7(a)

The primary way the U.S. Small Business Administration (USA) helps small businesses get money is through the SBA 7 (a) program. The SBA doesn’t fund these small business loans; it guarantees them.

The most 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 some debts. Interest rates are low, and it can take anywhere from 10 to 25 years to pay back.

SBA 504

The SBA 504 loan program offers loans to help cover the cost of real estate or fixed assets. These loans feature low-interest rates, low down payments, and attractive terms for business owners with solid credit scores 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 (guaranteed 100% by the SBA); 
• A third-party lender provides 50% or more of the financing; 
• The borrower contributes at least 10% of the financing. 

USDA Business & 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 make new ones. 

These loans can be used for:

• Working capital
• Commercial real estate improvement, purchases or development 
• Supplies, machinery, equipment, or inventory purchases
• Integrated agriculture production or processing facilities
• Business conversion, enlargement, modernization, development, or repair

Commercial Bridge loans

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

How does warehouse financing work?

Warehouse financing often gives borrowers better terms than short-term working capital (NWC) or unsecured loans, and the schedule for paying back the loan can be set up to match how the 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 an issue with repayment, the warehouse lender can take the goods and sell them on the market to get the money back. This kind of loan is often cheaper than an unsecured loan because the lender doesn’t have to fight in court for a long time to get their money back.

Pros and cons of warehouse financing

Here are some pros and cons of securing warehouse financing:

How can I get financing to purchase a warehouse?

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

In addition, to receive a lower interest rate, you’ll need to have an appraisal done. Based on the equity in the property, borrowers who need their warehouse loan to close quickly might seek no- or low-documentation loans. The normal loan-to-value (LTV) range for these loans is between 55 and 65%, and it can complete the closing process in as little as two weeks. Even though some lenders offer second mortgages as a way for borrowers to get capital that can ‌improve the property through expansion, remodels, landscaping, or other projects, warehouse mortgage financing typically takes the first position lien. This is because warehouse mortgage financing is considered a secured loan.

If you own or operate a warehouse, you might wish to seek the help of a commercial mortgage broker in order to better your financial situation.

Best options for warehouse financing

The best loan options depend on many factors, including your stage of business, your own capital, your real estate track record, and more. If the cons of warehouse financing outweigh the pros or it doesn’t quite meet the stage of your business needs, at present, there are other types of business financing to strongly consider. The easiest option is to sync your business with Nav’s small business loan matching tool, which ensures businesses find the best options for financing arrangements. 

Business owners can also seek to build a business credit line by checking out Nav’s resources. If your business credit score isn’t where you’d like it to be, learn how to establish business credit.

Here are ways ‌we suggest you can get started:

1. Register your business. Take the time to register your business with the state you live in or will conduct the bulk of your business. Forming an LLC, S-corp, C-corp, or sole proprietorship can also be a strong determinant for the ‌financing your business is eligible for.
2. Open a business credit card. The best way to boost business credit is to have it, use it, and pay on time. Nav’s business credit card resources will help you to get matched with the right card for your business.
3. Do business with companies that report your payment history to the bureaus. This requires that you are paying consistently and on time. A good rule of thumb is having at least 2-3 accounts with companies that report including suppliers and vendors or business loans and financing.

In whatever choice you decide to make, Nav plays a prominent role in helping you get whatever funding you need when you need it.