When skittish lenders scowl at the idea of advancing the amount of cash you need against your inventory, don't despair. You may be able to change their minds by offering to use a third-party collateral-control specialist. When you enlist an outsider experienced in the ins and outs of watching collateral, your lender may feel less exposed to the risk of vanishing inventory and misappropriated funds. You, in turn, will improve your chances of borrowing more money.
Collateral-control services are more popular in tight-credit periods, but the basic format has been around for decades. It works like this: whenever you receive delivery of goods, you pledge the inventory to the lender, just as you do in ordinary asset-based financing. The difference is in the level of control needed to assure the lender that the assets listed actually exist and are being properly monitored.
To begin with, selected employees of the borrowing company are bonded and deputized as field agents of the collateral-control firm. Technically, those agents are employed and paid by the collateral-control firm, but the borrowing company underwrites their salaries. They're required, among other things, to file weekly reports with the bank and collateral company on the ebb and flow of inventory, along with relevant documentation (invoices, shipment orders, and so on). For an added layer of security, collateral firms do their own verification on inventory every 30 or 60 days; some firms protect lenders even further with liability insurance. The cost of these features will vary; while they may add .5% to 1.5% to the cost of borrowing, the overall interest rate may not increase that much, since the added protection causes the lender's risk to be lower. -- Bruce G. Posner
Using Collateral Control Without Debt
You don't have to tap debt sources to find collateral-control services helpful. Some wholesalers and retailers use the approach to get better terms from vendors. Noah Hebert, who owns two large furniture stores in New Orleans, receives merchandise from more than 20 suppliers who agree to forgo payment until the items are sold. "If they didn't have confidence in the way the inventory is monitored," Hebert says, "they'd ship us a lot less. It's a sophisticated consignment system -- we get to keep an extensive inventory without borrowing from the bank."
If you're interested in exploring the collateral-control options that may be available for your business, ask your banker or accountant for local referrals. Also, there are several companies that do business nationally, including DiversiCorp, based in Dallas, (800) 875-9813; Douglas Guardian Warehouse, based in San Francisco, (800) 227-4644; and Inventory Verification Services, based in St. Louis, (800) 878-3444.