A field warehousing arrangement uses a company's inventory as collateral for a loan. The inventory to be used as collateral is segregated from the rest of the inventory by a fence, and all inventory movements into and out of this area are tightly controlled. Alternatively, the inventory may be stored in a public warehouse. State lien laws typically require that signs around the segregated area clearly state that there is a lien on the inventory stored inside.
When items are sold from this stock, the proceeds are paid to the finance company that is supporting the field warehouse financing arrangement. If the value of the inventory on hand declines below the amount of the outstanding loan, the borrower must immediately pay the difference to the finance company.
Usually, a person is assigned to monitor the flow of inventory into and out of the segregated area. If a looser arrangement is allowed, it may be acceptable to conduct regular counts of the inventory and provide updates to the finance company.
From a financing perspective, the total cost of funds associated with field warehouse financing is high. The reason is that so much labor must be expended to track inventory movements. Because of the cost, this form of financing is generally not considered until other financing alternatives have been explored. However, one benefit of this arrangement is that a finance company usually does not impose any covenants over the operation of the business, as may be imposed by a more traditional lender.
The profile of a company that might find field warehouse financing to be useful is an organization whose sales are growing rapidly, and which has sufficiently high margins on its product sales to be able to absorb the high costs of the arrangement. As the sales of this type of business gradually mature and plateau, the company can transition away from the financing arrangement and toward a more traditional bank loan or line of credit.