Relying on your cash flow to obtain products from suppliers can cause financial strain and stress if you have a growing business that relies on lots of inventory to keep going. This is where inventory financing comes in.
Inventory financing is designed to pay your supplier directly on your behalf, allowing you to meet your financial obligations while keeping your shelves stocked and your business’s reputation intact.
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How does inventory financing work?
Inventory financing is a line of credit or short-term loan that a business can use to buy the products it sells. Any inventory that you purchase becomes collateral for the loan, protecting the lender against default. If you’re not able to repay the loan, the lender can seize and sell the products to satisfy the debt.
Here’s a breakdown of how it works:
The lender pays your supplier.
The supplier ships the goods and you restock your inventory.
You sell your goods and repay the lender.
Depending on the lender, you may be able to apply for up to $1 million or more. The repayment period is determined by how long it would take to sell your inventory.
A shorter repayment term may mean a higher interest rate, but it’s usually a small increase. It could make financial sense to choose the shortest term you can afford because paying interest on a small loan over a longer period will eat away at your cash flow.
Which businesses could benefit from inventory financing?
Generally, inventory financing is used by manufacturers of consumer products and auto dealers that have large amounts of money tied up in inventory. This type of financing is especially good for businesses with international suppliers because sometimes there are delays between paying a supplier and receiving the goods.
Representative example: Michael and Jane expand their liquor store
Michael and Jane want to greatly expand their liquor store, so they can offer a wider range of high end selections. They can cover the cost of renovations, shelving and installation, which will be around $50,000.00. However, they need to get a business loan to pay for their new inventory, which will cost another $50,000.00 upfront. With good personal and business credit scores and, and using their store property as security, Michael and Jane get approved by an online lender for a 4-year loan with an interest rate of 7.25%.
Cost of expanding the liquor store
$100,000.00
Loan type
Business loan
Loan amount
$50,000.00
Interest rate (APR)
7.25%
Loan term
3 years
Additional fees
Origination fee of 3.00% ($1,500.00)
Monthly payment
$1,549.58
Total loan cost
$55,784.88
*The information in this example, including rates, fees and terms, is provided as a representative transaction. The actual cost of the product may vary depending on the retailer, the product specs and other factors.
What are the benefits of inventory financing?
Ideal for overseas suppliers. Shipping inventory from overseas can mean significant delays, especially if you have to put off paying your supplier. An unsecured inventory loan can expedite shipping, helping to eliminate unnecessary delays. You may also want to consider trade finance for international business transactions.
Avoid using working capital. You don’t have to dig into your working capital to unlock cash flow.
Enhance your business reputation. This solution can also help boost your business reputation because you’re able to take on bigger orders, which will increase your business capacity and maximize turnover.
What should I keep in mind before applying?
There are a few questions you can ask yourself before applying to ensure it’s the right decision:
What is the nature of your inventory? Slow-selling inventory may not be ideal for this type of finance as you may not find a lender who’ll approve you.
Are you confident in your inventory? Remember the lender has the right to inspect the inventory to ensure it’s maintained its value and that you keep track of all your inventory.
How to qualify for inventory financing
Lenders want to see that you’re able to make repayments, so you need to prove that your business is in decent shape financially. While you don’t have to put up collateral if applying for an unsecured inventory loan, your business must meet some standard eligibility requirements:
Time in the industry. Lenders like to see that your business has been operating for at least few years.
Minimum annual revenue. You must show your annual earnings. Minimum earning requirements differ from lender to lender but are typically at least $100,000 a year.
No credit defaults. Defaulting on existing financial commitments shows lenders that your business is not in a position to take on another loan.
Industry type. Whether or not a lender will approve a loan depends on your industry. If your business is in an industry considered to be volatile or unpredictable, your application might be rejected.
Bottom line
Inventory financing can be a useful option to keep your business moving if your cash flow relies on maintaining lots of inventory at once. Make sure you compare your loan options before you selecting a lender to ensure you get the right terms for your business’s needs.
Aliyyah Camp is a SEO content strategist and former publisher at Finder, specializing in consumer and business lending. Her writing and analysis has been featured in CentSai, the Dough Roller and the Chicago Tribune. She holds a BA in communication from the University of Pennsylvania. See full bio
Stacie Hurst is an editor at Finder, specializing in loans, banking, investing and money transfers. She has a Bachelor of Arts in Psychology and Writing, and she has completed FP Canada Institute's Financial Management Course. Before working in the publishing industry, Stacie completed one year of law school in the United States. When not working, she can usually be found watching K-dramas or playing games with her friends and family. See full bio
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