Retailers may need inventory financing with high consumer sentiment levels

Without a healthy stock of inventory, small- and medium-sized retailers may not be able to keep shelves full. To ensure product is always in stock, businesses can turn to inventory financing, and demand for this type of asset-based lending might rise since consumer confidence levels are high. 

The Thomson Reuters/University of Michigan preliminary reading on the overall index of consumer sentiment fell from a a six month high in August to 80. While a drop in confidence isn't typically a good sign, survey director Richard Curtin said the majority of respondents still believe economic expansion will continue. 

Part of the reason confidence levels have been high in the past couple of months has been increasing home values, which have pushed household wealth up. While some experts fear rising interest rates could hurt the housing market, Paul Ashworth, chief U.S. economist at Capital Economics, told Bloomberg that won't be the case. 

"Interest rates are going up a little bit, that never helps," he said. "But we still have the background of what looks like a still-improving housing market."

Home value appreciation to continue in the coming years
Household wealth and consumer confidence should further receive a boost in the next couple of years, as experts project appreciation to continue through 2017. 

More than 100 forecasters said home values will end the year up an average of 6.7 percent year-over-year, according to the latest Zillow Home Price Expectations Survey. In 2014, 4.4 percent appreciation is expected while gains of 3.6 percent, 3.5 percent and 3.4 percent were projected for 2015, 2016 and 2017, respectively. 

"Short-term expectations for home value appreciation through the end of this year are consistent with a nationwide housing market recovery that is both strengthening and widening, but still coping with high levels of negative equity, high demand and low inventory," said Zillow senior economist Dr. Svenja Gudell. "Combined, these factors will continue putting upward pressure on home values for the next few months."

Strong employment situation also boosting confidence
Rising home values aren't the only factor driving sentiment among consumers, as the jobs market is also showing signs of improvement.

Private sector employment increased by 200,000 jobs in July, according to the ADP National Employment Report. Small businesses led the way with 82,000 new positions, followed by medium and large companies. The only industry with a decline in the number of jobs was manufacturing. 

"Job growth remains remarkably stable," said chief economist of Moody's Analytics Mark Zandi. "Businesses are adding to payrolls in most industries and across all company sizes. The job market has admirably weathered the fiscal headwinds, tax increases and government spending cuts. This bodes well for the next year when those headwinds are set to fade."

Inventory financing demand could rise with high confidence
Should confident consumers translate into increased sales levels at small- and medium-sized retailers, reliance on inventory financing may increase. 

With product coming off the shelves, these businesses will need to find a way to replenish inventory. Smaller companies generally don't have the cash on hand to do this on their own, which is why financing may be needed. 

Initially, retailers may turn to a bank, but there is a chance they will be declined for any number of reasons, such as limited available capital or poor credit. Fortunately, inventory financing is available. This form of asset-based lending enables small- to medium-sized businesses to use current product as collateral to obtain a revolving line of credit, which can then be utilized to purchase additional inventory and keep shelves stocked.