Inventory financing gives your business the cash flow it needs to fill orders and grow. While traditional inventory financing works directly with your supplier, you can use almost any business loan or line of credit to cover the cost of new inventory. The best option for your business depends on factors like your industry and how often you’ll need financing.
Inventory financing is a type of loan businesses use to buy products to sell or materials to make their products. It’s most common for small or growing businesses that don’t qualify for traditional bank loans but need funds to meet demand, cover cash flow gaps or stock up for busy seasons. While it can be more expensive than a regular bank loan, inventory financing usually has easier requirements for credit, revenue and time in business. Some lenders can even fund loans within 24 hours.
How does inventory financing work?
Inventory financing gives your business credit to purchase inventory. Often, the goods you buy act as collateral — if you fail to repay, the lender can seize that inventory.
Key points:
Unsecured options. Some lenders offer financing without collateral, which can be useful for perishable goods. These include unsecured lines of credit, term loans, accounts receivable financing and merchant cash advances, though they typically cost more.
Existing inventory as collateral. Some lenders let you use the inventory you already own. The loan amount usually depends on the inventory’s appraised value, and a down payment of around 20% may be required.
Payment and fees. Lenders may pay your supplier directly, collect payments in installments or as a percentage of sales, and often charge a fixed fee rather than traditional interest, sometimes resulting in high APRs.
Use of funds. Funds can be used for any legitimate business purpose, including buying new inventory or covering cash flow gaps.
Note: If you only need to finance a specific customer order, purchase order financing may be a better fit.
Inventory financing example
Imagine you run an online store selling kitchen appliances.
Monthly sales: $15,000
Inventory funding needed: $9,500
If you’re using the loan to buy new inventory, lenders usually base your loan amount on the manufacturer’s price of the goods you’re purchasing.
If you’re using existing inventory as collateral:
Some lenders will appraise your current inventory before approving the loan.
You may need to hire an appraiser to estimate how much the lender could recover if they had to sell it.
Inventory loses value over time, so lenders usually offer about 80% of its appraised value.
Example calculation:
Inventory appraised at: $12,000
Lender requires 20% down, so your loan amount is $9,600
Some lenders (mostly banks) may inspect your inventory periodically while you repay the loan. But online lenders are less likely to require inspections.
Pros and cons of inventory financing
Inventory financing has many benefits, but it comes with several drawbacks you should also consider before applying.
Pros
Collateral built into the loan. Secured loans are typically easier to qualify for and may help you get a lower rate, too.
Can send funds directly to suppliers. Some inventory financing providers will send the money directly to your supplier, which can speed up the process. They may even offer to continually finance your inventory if you regularly experience cash flow gaps.
Options for bad credit and startups. You may be able to qualify for certain types of inventory financing even if your credit isn’t great or you’re a newer business.
Many providers offer loyalty discounts. Repeat clients can often qualify for lower rates or more favorable loan terms.
Doesn’t rely as heavily on credit scores. This is more true if the loan is secured or you seek less traditional forms of funding, such as business cash advances or invoice factoring.
Cons
Potentially high rates. Financing your inventory could be pricey, especially if the funding is unsecured or you don’t have ideal credit.
Short terms. In general, most forms of inventory financing have relatively short loan terms, which can result in large repayments.
May require a down payment. In some cases, you may need to come up with 20% to put down on your loan.
May require an appraisal. If you’re using your existing inventory to secure a loan, the lender may require an appraisal to determine its liquidation value if you default.
Daily or weekly repayments are common. Oftentimes, the options suitable for inventory financing require weekly or even daily repayments, which can sometimes be a struggle.
Alternatives to traditional inventory financing
There are other ways to finance inventory without using your inventory as collateral. These include unsecured term loans, lines of credit and cash advances. However, some lenders may consider business assets like property or equipment as collateral instead of inventory.
A line of credit allows your business to access cash continually to replenish your inventory as needed. You can typically use your inventory as collateral or apply for an unsecured credit line. But generally, you’ll have to pay the manufacturer yourself, so it requires more work than traditional inventory financing.
Lines of credit tend to be less expensive than inventory financing because they usually come with interest instead of a fixed fee. But credit lines of online lenders are often more expensive, with rates reaching up to 80% APR or more in some cases.
Term loans
A term loan offers a one-time lump sum of financing, which you repay plus interest. It’s a good choice for businesses that don’t regularly need inventory financing. Like a line of credit, you can use the inventory as collateral or apply for an unsecured term loan. And also, like a line of credit, you’ll have to pay your suppliers yourself, so it may take a little more time to receive your inventory.
Merchant cash advances give an advance on future sales for businesses that serve customers, like retailers. You can usually get a percentage of your average monthly sales up front, which you repay with a percentage of your daily sales — plus a fixed fee. These typically don’t come with strict credit or time-in-business requirements.
But merchant cash advances are one of the most expensive types of business financing. APRs regularly reach 300%, and the daily payment schedule can be rigorous. You may want to save this option as a last resort.
Accounts receivable financing
Accounts receivable financing includes invoice factoring and invoice financing. Factoring means selling unpaid invoices at a discount, while invoice financing lets you keep control of them. It’s best for businesses selling to other businesses or government agencies.
You can usually get 85–90% of your invoice value up front, with the remainder (minus fees) paid once clients settle their bills. Invoice financing works similarly, with repayment as customers pay.
Eligibility doesn’t depend on credit history, making it a good choice for startups or owners with bad credit, though APRs are higher than typical term loans or lines of credit.
How inventory financing differs from accounts receivable financing
Inventory financing funds future inventory purchases, while accounts receivable financing advances cash for work you’ve already completed. AR financing can cover any business expense, including inventory, but inventory financing is only for buying inventory.
The structures differ. Inventory financing is a loan backed by your inventory, repaid in installments. Accounts receivable financing usually means selling unpaid invoices to a factoring company, which collects from your clients or requires repayment as invoices are paid.
Both options are high-risk and can be expensive, but the risks vary: inventory can lose value over time, while clients might not pay invoices. Inventory financing works for retailers and wholesalers. Accounts receivable financing is typically limited to wholesalers.
How to qualify for inventory financing
Each lender has different requirements, and it also depends on the type of funding, but generally, you must meet the following criteria to qualify for an inventory financing loan.
Fair credit score of 600+
Annual revenue of at least $100,000
At least six months in business
Work in an eligible industry
While it’s possible to use a bank loan to finance inventory, banks are typically harder to qualify with than online providers. You can often check if your business qualifies by filling out a preapplication form on the lender’s website or by calling the lender directly.
How the economy may affect your chances of getting inventory financing
Whether you sell household goods or fashion accessories, lenders assess the value of your inventory when making a financing decision. They look at factors like resale value, depreciation and likelihood of theft, as well as the state of the overall economy, to determine eligibility.
When the economy is in a recession, products that aren’t staples may not sell, making inventory financing risky for lenders. If your business sells products that the average consumer isn’t likely to buy when their budgets shrink, like they did during the global financial crisis of 2008, you may have difficulty securing inventory financing, if at all.
Frequently asked questions
You typically can't qualify for inventory financing without a record of at least a few months of sales. If you need seed money to buy inventory, microloans might be your best option. Typically, microlenders offer up to $50,000 in financing and have programs designed to help startups get off the ground.
It can be. If you don't have the cash on hand to expand your inventory, it can be tough to grow your business. However, you'll need to make sure the financing fits into your budget so you don't over-extend yourself and have trouble repaying the loan.
Lacey Stark is a freelance personal finance writer for Finder, specializing
in banking, loans, investing, estate planning, and more. She has 20
years of experience writing and editing for magazines, newspapers, and
online publications. A word nerd from childhood, Lacey officially got her
start reporting on live sporting events and moved on to cover topics
such as construction, technology, and travel before finding her niche in
personal finance. Originally from New England, she received her
bachelor’s degree from the University of Denver and completed a
postgraduate journalism program at Metropolitan State University also
in Denver. She currently lives in Chicagoland with her dog Chunk and
likes to read and play golf.
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