Field warehouse financing definition
/What is Field Warehouse Financing?
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.
Example of Field Warehouse Financing
A distributor of industrial-grade vacuum cleaners wants to keep 500 of these units in stock, which would cost it $750,000. The firm cannot obtain these funds from a commercial bank, so it elects to obtain the funding from a finance company instead, under a field warehouse financing arrangement. The finance company mandates that the vacuum cleaners be stored within a fenced-off area, and imposes a lien on the inventory. When the distributor sells a unit from stock, it immediately transfers the cost of that unit to the finance company, thereby drawing down the loan. The finance company bills the distributor at the end of each month for the cost of funds outstanding during that period.
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The Cost of Field Warehouse Financing
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.
Who Should Use Field Warehouse Financing?
Organizations that might use field warehouse financing are ones whose sales are growing rapidly, and which have sufficiently high margins on their product sales 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. These arrangements are more common for smaller retailers and wholesalers that do not have ready access to lower-cost bank loans.