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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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:
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.
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.
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.
There are a few questions you can ask yourself before applying to ensure it’s the right decision:
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:
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.
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