Inventory Financing

Inventory financing is a type of business credit that allows companies to borrow money using their inventory as collateral. It is available from traditional banks, online lenders and specialized inventory finance companies.

The loan process varies by lender, but typically involves a field audit that includes reviewing your inventory. These types of loans often come with high interest rates and short loan terms.

Getting a Loan or Line of Credit

If you need to replenish your inventory for the busiest time of year, update your product line or cover short-term cash flow gaps, inventory financing may be a good fit. This type of small business financing typically doesn’t require a personal guarantee or the use of other business assets as collateral, making it a great option for companies with less-than-stellar credit scores or those that don’t have enough operating history to qualify for traditional loans.

While the value of your current inventory will be the primary source of security, lenders are also interested in your sales forecast for the future. Expect to provide a detailed profit and loss statement as well as a thorough appraisal of your merchandise to complete the loan process.

Depending on your lender, inventory financing can either function as a business term loan or as a revolving line of credit that you draw against as needed. While you can usually borrow up to 100% of your inventory’s total value, most lenders will finance only a percentage of that amount to mitigate their risk.


Inventory financing is different from other small business loans in that the lender only uses your inventory as collateral for the loan. This means that if you default on the loan, they have the right to take your inventory back. This is one reason that lenders require a higher level of due diligence for inventory financing than other small business loans.

Typically, a small business will use inventory financing to meet increased customer demand, get ready for a busy season or upgrade a product line. It’s also used for companies that have a long cash conversion cycle or need to manage seasonal demand.

Most lenders don’t require that you offer personal or business assets as collateral for inventory financing, making it easier to qualify. Less-than-perfect credit isn’t usually a deal-breaker, and newer businesses are eligible as they only need to be in operation for up to a year to qualify. However, it’s important to know that this type of lending can be expensive because of the fees and interest rates involved. This is why it’s important to compare rates and lenders before choosing inventory financing.

Time to Funding

Inventory financing lets companies buy the products they sell to consumers without having to put up their business or personal assets. Typically, it’s a quicker process than applying for traditional loans.

Lenders evaluate the sales worth of your products as part of the financing application process and then provide a line of credit based on that value. They also look for other proof points, such as your marketing plan, payment capture systems, order fulfillment processes, and your sales projections.

Most lenders require at least a year of operations under your belt to qualify for inventory financing, but the longer you’ve been in business, the better your odds are of approval since you have a stronger sales history. However, newer businesses can still qualify with strong sales forecasts and solid collateral. Companies that can take advantage of this type of financing include retail and ecommerce stores, wholesalers/distributors, and seasonal business who sell products during specific times of the year and earn revenue with predictable frequency. Some lenders may charge prepayment fees or late payment fees.

Interest Rates

Business owners with high inventory turnover and a solid sales history are often able to secure funding for this type of financing. It may also make sense for seasonal businesses or those that do not have a large enough business history to secure loans and lines of credit from banks or other lenders.

Interest rates associated with inventory financing vary from lender to lender. Financiers base their loan amounts on existing inventory valuation and add other terms, conditions and fees to the equation. This can lead to payment percentages and interest rates that are significantly higher than traditional small business loans.

It is important to take the time to evaluate a company’s inventory needs carefully before applying for this type of funding. This should include a careful review of current inventory and forecasts. A firm should also assess its creditworthiness and willingness to accept periodic inspections from a lender or inventory financing company. This helps avoid underestimating inventory needs, overestimating a company’s ability to repay the borrowed funds, or incurring unnecessary hefty payments or carrying costs for unsold merchandise.

Repayment Terms

Getting inventory financing is all about convincing lenders that your company will be able to sell the merchandise you use as collateral. To that end, lenders typically focus on your business history and sales forecasts. In particular, they’ll want to make sure that the new inventory you buy with their funds will be a good fit for your product line and that you’re well-prepared for high-volume sales periods like the holidays and BFCM.

If you have the right documents in place, lenders will likely offer you either an inventory loan or an inventory line of credit. Both options work in similar ways. The key difference is that inventory loans require you to pay back the borrowed sum through fixed monthly payments during a set term or in a lump sum following the sale of your inventory. Inventory lines of credit, on the other hand, provide revolving access to funds that you repay as you sell merchandise. This type of financing can be more affordable than a traditional bank loan since you’re not required to pledge valuable business assets.