What Is Inventory Financing & How Does It Work?

You need to buy inventory for your company, but you don’t have enough capital to do so. Conventional financing is not a viable option for your business, but you know you can quickly sell the inventory you want to purchase.

Is there a way to leverage your inventory and use that as collateral? What other options are available to you? Read on to learn about inventory financing and whether it’s a good fit for your business.

What Inventory Financing Is & How It Works

Inventory financing is a type of asset-based loan in which the inventory you’re purchasing with the loan is used as collateral to secure the loan. Depending on the arrangement, the lender may also require you to put up your accounts receivable as collateral.

The amount of financing you receive is directly related to the value of the inventory in question, usually 70 to 80% of the inventory’s value. As you sell the inventory you purchase with the loan proceeds, you’ll be able to repay the loan.

Inventory financing is typically used by large upstream producers and distributors of tangible goods, such as manufacturing companies and product wholesalers. You’ll need to both carry a lot of inventory and be purchasing a large quantity of inventory to qualify for this type of financing.

Inventory Financing VS Inventory Loans

Inventory financing products are sometimes conflated with “inventory loans,” which is a more general term.

An inventory loan is simply a loan to purchase inventory, whereas inventory financing refers to a specific type of loan wherein the inventory purchased with the loan is used to secure the loan.

A standard business loan to purchase inventory may instead require another type of specific collateral, a personal guarantee, or a general blanket lien on all of your business assets.

Unlike inventory financing, which is appropriate for large B2B businesses, other types of inventory loans can be used by small B2C businesses.

Types Of Inventory Financing

All inventory financing uses inventory as collateral, but there are still different types of financing agreements. In this section, let’s look at the types of loans used for inventory financing.

Expected Rates & Terms For Inventory Financing

Rates and terms for inventory financing vary depending on the lender and the type of inventory financing you’re applying for. But some things are true of inventory financing and asset-based lenders in general :

• Loan minimums are high (usually $500K+)
• You can only be approved for 70% to 80% of the assessed value of the inventory you’re purchasing
• The value of your current inventory must be at least twice the amount you’re asking to borrow
• Interest rates are typically in the high teens
• Repayment terms are short (up to 3 months)
• Time to funding may be as long as 30 days
• The lender may do an on-site inspection of your inventory and your inventory management system, and you will need to pay the associated inspection costs
• If you fail to repay the inventory loan or line of credit on time, your inventory will be repossessed

If these terms don’t sound like they would make sense for your business, you may be better served by an online inventory loan, which is more appropriate for smaller businesses.

When Inventory Financing Is A Good Choice For Your Business Funding Needs

As mentioned, inventory financing can be suitable for manufacturing and distribution companies. In some cases, it could also be suitable for large retailers. Consider whether the following applies to your business:

Compared to a standard business loan, inventory financing is more expensive but is usually easier to obtain, as long as you have a larger, established business and your inventory is selling quickly.

You do not necessarily need to have good credit, but you will need to demonstrate a strong sales record that indicates you will be able to easily sell the inventory you are purchasing. You will generally be able to borrow up to 50% of the value of your current inventory.

When To Avoid Inventory Financing

If you have a newer business without a demonstrable sales history, or your current inventory is losing value and not selling, it’s unlikely that an inventory financing company would be interested in lending to you.

This type of financing also isn’t suited for startups or smaller business-to-consumer companies such as independent retailers that only need to purchase $50,000 worth of inventory. In those cases, you’d be better off with an online inventory loan, such as a short-term working capital loan or business line of credit.

Even if you do qualify for inventory financing from an asset-based lender, you may still want to avoid this type of financing if there’s a chance you could qualify for a better loan, such as an SBA 7(a) loan. This is because inventory financing loans are more expensive than traditional business loans.

How To Find An Inventory Financing Company

Due to the large sums of money involved, the complex nature of asset-based loans, and all the due diligence involved in securing inventory financing, you will likely want to find a loan specialist who can guide you to navigate your inventory financing options and find a suitable lender for your company.

There are also online loan matchmaking services such as Lendio that you may be able to use to secure inventory financing.