What is Warehouse Financing
Warehouse financing is a form of inventory financing in which loans are made to manufacturers and processors on the basis of goods or commodities held in trust as collateral for the loans. The goods may be held in public warehouses approved by the lender, or may be held in field warehouses located in the borrower's facilities but controlled by an independent third party. 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 stored goods or commodities.
BREAKING DOWN Warehouse Financing
Warehouse financing offers a number of benefits to the borrower. It leverages the use of raw material as the primary collateral, while additional financing can be synchronized with the build-up of the stock. Warehouse financing also enables borrowers to obtain financing on more favorable terms than short-term working capital or unsecured loans, while the repayment schedule can be coordinated with the actual usage of raw material.
Warehouse financing is often less expensive than other borrowing because it is a form of secured lending. The commodity inventory in the warehouse is contractually pledged to the lender so that if the borrower fails to pay, the lender can take the inventory and sell it on the market to recover the loan. This form of lending is often less expensive because the lender would not be involved in lengthy legal battles to recover the loan in the same way as they would if the loan were unsecured.
This readily marketable inventory offers a borrowing cost advantage to commodity producers over other types of companies that also want access to debt financing. A commodity company can improve their credit rating, lower their borrowing costs and potentially secure a larger loan by utilizing warehouse financing. This offers a business advantage to a similar sized company with such resources.