Field warehouse financing definition
/What is Field Warehouse Financing?
Under a field warehouse financing arrangement, a finance company segregates a portion of a borrower’s warehouse area with a fence. All inventory within the fence is collateral for a loan from the finance company to the borrower. The finance company will pay for more raw materials as they are needed, and is paid back directly from accounts receivable as soon as customer payments are received. If a strict inventory control system is in place, the finance company will also employ someone who records all additions to and withdrawals from the secured warehouse. If not, the borrower is required to frequently count all items within the secure area and report this information back to the finance company. If the level of inventory drops below the amount of the loan, the borrower must pay back the finance company the difference between the outstanding loan amount and the total inventory valuation. The company is also required under state lien laws to post signs around the secured area, stating that a lien is in place on its contents.
How Expensive is Field Warehouse Financing?
A field warehouse financing arrangement is expensive, given the extra effort required to continually keep track of the inventory collateral, and so is not the first financing option that a company will usually consider. It is more commonly used by businesses with a large finished goods inventory and poor credit with more mainstream lenders.
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Example of Field Warehouse Financing
Anderson Widgets produces and sells electronic components. To meet growing demand, the company needs to purchase a large quantity of raw materials but lacks the immediate cash flow to do so. Its CFO approaches a bank for financing, which results in the following field warehouse financing steps:
The bank agrees to provide a loan secured by the company’s existing finished goods inventory.
A third-party warehouse company, approved by the bank, sets up a "field warehouse" on Anderson’s premises. This warehouse is sectioned off and managed entirely by the third-party company.
The inventory in the field warehouse is tagged and monitored by the third-party operator to ensure it remains secure and separate from Anderson's other operations.
Anderson receives the loan from the bank and uses the funds to purchase raw materials and continue production.
As Anderson sells the inventory stored in the field warehouse, it pays down the loan, often through a pre-agreed process where a portion of sales proceeds is remitted directly to the lender.
This financing arrangement helps businesses leverage their inventory for liquidity while providing lenders with assurance of collateral integrity.