When applying for loans, why would a bank approve an inventory loan but deny an operating loan?

The reason the bank might approve an inventory loan while denying an operating loan is closely tied to the concept of collateral. An inventory loan is secured by the actual inventory itself, which provides the bank with a tangible asset that can be sold if the borrower defaults on the loan. This reduces the risk for the bank, making them more inclined to approve the loan as they have a way to recover their funds.

In contrast, an operating loan typically does not come with such collateral. It is often used for day-to-day expenses and working capital, which are harder for the bank to secure against a specific asset. Without collateral, banks view operating loans as riskier propositions because there’s nothing tangible to fall back on if repayments are missed. This added risk can lead to a higher likelihood that such loans will be denied, whereas the presence of collateral in an inventory loan provides a level of assurance to the lender.

This distinction emphasizes the importance of having assets that can serve as security when seeking financing, particularly in an entrepreneurial context where cash flow can be unstable.