Inventory financing may increasingly be needed as economic confidence dips

Consumers began to show heightened confidence in the economy during May, but June hasn't been as good a month, with economic confidence edging downward. 

With Americans not feeling as positive about the economy, retail sales may decline in the near future, potentially leading to a greater need for inventory financing

After reaching a five-year high to end May, Americans' confidence in the economy fell for two consecutive weeks to begin June, according to Gallup. The Economic Confidence Index is now at minus-9, which is the lowest level it has been in more than a month. 

Between March and the end of May, the index improved from minus-22 to minus-3, but more volatile stock prices and concerns that the Federal Reserve might scale back stimulus efforts led to the consecutive weekly decreases. 

The dip in economic confidence can be seen through the drop in the Thomson Reuters/University of Michigan index of consumer sentiment in early June. The index fell to 82.7 from last month's 84.5, as consumers were less optimistic about job prospects. 

"Consumers continue to show hot-and-cold sentiment in the second quarter, unable to really evaluate true feelings about their current situation," Leslie Levesque, senior economist at IHS Global Insight, told the Los Angeles Times. 

Should retail sales slow down over the summer, small-to medium-sized businesses might enter a period where cash flow falls below normal levels. During these periods, it can be difficult to operate, so retailers might need to turn to inventory financing. 

This form of asset-based lending allows businesses to use current inventory as collateral to obtain a revolving line of credit, which, in turn, can be used to help retailers operate at normal levels when cash flow is lagging.