Warehouse financing is basically a form of inventory financing. A financial institution makes this loan to a company, manufacturer, or processor. The borrower transfers existing inventory, goods, or commodities to a warehouse and uses them as collateral for the loan.
Smaller privately-owned firms most often use warehouse financing. Particularly those in product-related businesses that do not have access to other options.
Note that warehouse financing is different from warehouse lending. Warehouse lending is a way for a bank to provide loans without using its own capital.
Understanding Warehouse Financing
Warehouse financing is an option for small- to medium-sized retailers and wholesalers.
Lenders may hold collateral—goods, inventory, or commodities—in approved public warehouses or in field warehouses at the borrower’s facilities managed by an independent third party.
Take the example of a manufacturer of electric car batteries that has used up its entire line of credit and needs another $5 million to expand operations. It asks around and finds a bank willing to offer a loan through warehouse financing. The bank accepts the company’s unsold car batteries as collateral and transfers them to a third-party-controlled warehouse. If the company fails to pay the loan, the bank can begin selling the batteries to cover the loan. Alternatively, the company can repay the loan and begin taking possession of its batteries again.
A financial institution engaged in warehouse financing will usually designate a collateral manager who issues a warehouse receipt to the borrower that certifies the quantity and quality of the goods. The lender controls the use of raw materials as the primary collateral and synchronizes additional financing with stock or inventory build-up.
Benefits of Warehouse Financing
Warehouse financing often enables borrowers to obtain financing on more favorable terms than short-term working capital or unsecured loans. The repayment schedule can be coordinated with the actual usage of inventories or materials.
​Since it is secure lending, warehouse financing is often less expensive than other types of borrowing. The borrower pledges warehouse inventory to the lender, who can sell it if payments fail. This secured lending is cheaper since it avoids lengthy legal battles.
A commodity company can also improve its credit rating, lower its borrowing costs, and potentially secure a larger loan when utilizing warehouse financing. This offers a business advantage to a similar-sized company without such resources.
