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Inventory financing: 5 options and how they work
Scale up your business or cover cash flow gaps — but watch out for some high-cost options.
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.
What is inventory financing?
Inventory financing is any type of financing that a business uses to buy wholesale products to sell. It’s most commonly used by growing small businesses that can’t qualify for a bank loan but need funds to meet demand. It can also be used to improve cash flow. While inventory financing often more expensive than a traditional bank loan, but comes with more lower time in business, credit score and revenue requirements. It’s also faster — some providers can fund a loan within 24 hours.
How does inventory financing work?
Inventory financing often works by giving your business credit to purchase inventory, which it uses as collateral. Often, inventory financing uses the inventory you purchase as collateral. If you default on the loan, your lender can seize your inventory to make up for the lost payment.
However, it’s possible to find financing options to pay for inventory without collateral. These may be a better option if you’re buying perishable inventory, like produce. Unsecured options include unsecured lines of credit and term loans. Accounts receivable financing and merchant cash advances also don’t require collateral, but at a higher cost.
In some cases, some lenders offer loans secured with inventory your business already owns as collateral. You can use the funds for any legitimate business use — including purchasing new inventory.
Inventory financing example
Say you run an online store that sells kitchen appliances. You regularly bring in $15,000 a month in sales, but this month you need about $9,500 to cover your inventory costs.
If you’re using the loan to purchase new inventory, the lender typically bases your loan amount on the manufacturer’s price of your inventory.
But if you’re using inventory your business already owns to secure the loan, some lenders will appraise the value of your inventory after you get started on the application. Often, this means you’ll have to hire an appraiser to assess your inventory and calculate how much the bank would be able to receive if it had to seize and sell your inventory as collateral.
Because inventory often depreciates, or loses value over time, you often can’t receive funding to pay for the full cost of your purchase. Typically, you’ll qualify for around 80% of your inventory’s liquidation value. So if the inventory was appraised at $12,000 and the lender asks for a 20% down payment, you’ll qualify for $9,600 in as a loan or line of credit.
Some lenders might do regular inspections of your inventory as you pay off the loan or credit line. But this is more common with banks than online lenders.
Pros and cons
Inventory financing has many benefits, but it comes with several drawbacks you should consider before applying.
Collateral built into the loan
Can send funds directly to your supplier
Options for bad credit and startups
Many providers offer loyalty discounts
Potentially high rates and short terms
Might require a down payment
May require appraisal of inventory
Daily or weekly payments are common
Pros of inventory financing
One of the main benefits of inventory financing is that it comes with collateral built into the loan. That can make it easier to qualify for than other types of financing. And even unsecured inventory financing options typically come with fewer requirements than your typical lender.
Traditional inventory financing providers can also sometimes send the funds directly to your supplier to speed up the process. And many offer the option to continually finance your inventory expenses if you experience cash flow gaps.
Cons of inventory financing
One of the main drawbacks of inventory financing is that many options often comes with high interest and short loan terms compared to a traditional bank loan. Especially if you go with a provider that doesn’t require collateral and accepts startups or poor credit.
If you go with a lender that uses your inventory as collateral, you might also be required to pay a down payment on your inventory. In some cases you also might need to have your inventory regularly appraised. This is can be time-consuming for some businesses — and difficult to conduct if you operate entirely online.
Types of inventory financing
There are several types of inventory financing including term loans, lines of credit and cash advances. Some may use your inventory as collateral for the loan or line of credit. Others use other business assets as collateral — or none at all.
Traditional inventory financing is a short-term loan that your business uses to buy the products it sells. These typically use your inventory as collateral, so how much you borrow depends on the value of your inventory. And if you fail to repay the loan, you’ll lose your inventory.
When you borrow from a lender that specializes in inventory financing, the lender often requires a down payment of around 20% and pays your supplier directly instead of sending you the funds. Sometimes, you’re required to work with specific fulfillment centers to qualify for a loan — especially if you have an online business.
These providers sometimes collect payments in monthly installments, or a percentage of your sales. Often you’ll pay a fixed fee instead of interest, which can result in APRs well over 100%.
Kickpay is an inventory financing provider for e-commerce platforms. Your loan amount is based on the manufacturing cost of inventory you normally sell over 16 weeks. It charges a competitive fixed fee of 3% to 7%, which pay along with the loan as customers buy the product. But you'll have to work with an eligible fulfillment center to qualify and all of your inventory must be stored in the US. It also doesn't work with fashion businesses.
Pros
Sends funds to your manufacturer
Low fee compared to similar providers
Convenient source of continual financing
Cons
Fast fashion companies are ineligible
Must work with an eligible fulfillment center
Inventory must be stored in US
Loan amount
$20,000 – $1,000,000
APR
Not applicable
Min. Credit Score
None
Loan Term
16 weeks
Requirements
At least $250,000 in the past 12 months of revenue, e-commerce business, use a 3rd party fulfillment center for storing and shipping inventory, at least one US location.
Information about Kickpay e-commerce business loans was verified on 06/10/2021.
Lines of credit
A line of credit allows your business to have continual access to cash to replenish your inventory as needed. You often have the option to 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 as high as 80% in some cases.
BlueVine is an online lender that can fund your loan within two business days. It has a low starting APR compared to other online providers and charges no monthly, origination, draw or maintenance fees. It's a great option for startups — you only need to be in business for two months to qualify. But you'll have to repay each draw as a term loan over six months to a year. And BlueVine charges weekly, rather than monthly payments.
Pros
No origination or draw fees
Accepts fair credit
Same-day funding available
Cons
Weekly payments
$15 fee for same-day funding
Doesn't disclose maximum APR
Loan amount
$5,000 – $250,000
APR
Starting at 4.8%
Loan Term
6 to 12 months
Requirements
6+ months in business, $10,000+ in monthly revenue, 600+ credit score
OnDeck is another online lender that's known for using alternative data like shipping records to help small businesses qualify for competitive rates. Its loyalty discount can be a good option if you're going to regularly need inventory financing. And it accepts fair credit scores as low as 600. But it charges high rates compared to a bank, and not all industries are eligible. And each draw turns into a short-term loan with weekly or daily repayments.
Pros
Fair credit OK
Loyalty discount
Only requires bank statements
Cons
Daily or weekly payments
Limited industry eligibility
High average APRs over 35%
Loan amount
$5,000 – $100,000
APR
Starting from 35.9%
Loan Term
Up to 12 months
Requirements
Companies in business at least 1 year, $100,000+ in gross annual revenue and majority owner with a 600+ personal credit score
Information about OnDeck business lines of credit was verified on 06/10/2021.
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 with 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.
Funding Circle is a peer-to-peer platform that offers short-term loans with no minimum revenue requirements. It accepts fair credit and has a strong reputation for customer service. But it's not ideal for startups — you have to be in business for at least two years to qualify. And its starting origination fee of 3.49% is higher than average.
Pros
No minimum revenue requirement
No prepayment penalty
Accepts fair credit
Cons
High starting origination fee
Not startup friendly
Can take five business days to fund
Loan amount
$25,000 – $500,000
APR
Starting at 4.99%
Loan Term
3 to 120 months
Requirements
660+ personal credit score, 2+ years in business, for-profit business in an approved industry, not located in Nevada
OnDeck offers short-term loans to fair credit borrowers with a turnaround as soon as the next business day. It only requires one year in business and a personal credit score of at least 600 to qualify. But the rates on its term loans are higher than the line of credit, averaging at around 40% APR. But you can qualify for a lower origination fee if you take out more than one loan.
Pros
Accepts fair credit
Loyalty discount
Only one year in business required
Cons
Average APR over 40%
Higher-than-average starting rates
Weekly repayments
Loan amount
$5,000 – $250,000
APR
As low as 35%
Min. Credit Score
600
Loan Term
3 to 18 months
Requirements
600+ personal credit score, 1 year in business, $100,000+ annual revenue
Information about OnDeck short-term loans was verified on 06/10/2021.
Accounts receivable financing
Accounts receivable financing, also known as factoring, involves selling your business’s unpaid invoices to a factoring company at a discount. This is generally best for businesses that work with other businesses or government agencies.
Usually you can receive around 85% of the value of your unpaid invoices upfront. The factoring company will give you the remaining amount, less a fee, after your clients fill the invoices.
Your eligibility doesn’t rely on your personal or business financial history, making it a good option for startups and business owners with bad credit. But like a lot of options that are friendly to startups or bad credit, the fee can translate into APRs that are higher than your average term loan or line of credit.
Lendio is an online connection service that can help your business find the right company for accounts receivable financing. It works with factoring companies that offer up to 90% of your receivables upfront within 24 hours after getting approved. And factor rates start at 2% of your account receivable's value. But since it's not a direct lender, read up on the provider you're connected with to make sure it's a good fit.
Pros
Funding within 24 hours
Get up to 90% of AR value
Fixed fee of 2%
Cons
Not a direct lender
Doesn't disclose factor companies on website
Loan amount
$500 – $5,000,000
APR
Starting at 6%
Loan Term
1 to 25 years
Requirements
Operate business in US or Canada, have a business bank account, 560+ personal credit score
Information about Lendio business loans was verified on 06/10/2021.
Merchant Cash Advances
Merchant cash advances give your business an advance on future sales for businesses that serve consumers. You can usually get a percentage of your average monthly sales upfront, which you repay plus a fixed fee with a percentage of your daily sales. These typically don’t come with credit or time in business requirements.
But merchant cash advances are one of the most expensive types of business financing out there. APRs regularly reach 300% and the daily payments can be inflexible. Save this option for a last resort.
Fora Financial is an online lender that offers merchant cash advance at relatively low factor rates starting at 1.1. You also have as long as 15 months to pay off your advance, which is a long term for a factoring company. And you only need to be in business for six months to qualify. But it's not completely transparent about costs on its website. And it can take up to three days to fund your loan.
Pros
Low factor rates starting at 1.1
Terms as long as 15 months
Only requires six months in business
Cons
Doesn't disclose costs on website
Expensive compared to other types of financing
Loan amount
$5,000 – $500,000
APR
Varies
Loan Term
4 to 15 months
Requirements
6+ months in business, $12,000+ monthly revenue, no open bankruptcies
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
Each lender has different requirements, but generally you must meet the following criteria to qualify for an inventory financing loan.
Fair credit score of at least 600
Annual revenue of at least $100,000
At least six months in business
US citizen or permanent resident
Over 18
Eligible industry
While it’s possible to use a bank loan to finance inventory, banks harder to qualify with than online inventory financing providers. You can often check if your business qualifies by filling out a preapplication form on the lender’s website.
Inventory financing for startups
Inventory is one of the first things you’ll need to purchase if you’re starting a new company. But 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 that are designed to help get startups off the ground.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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