Inventory Financing

Inventory financing can come in the form of either a loan or a line of credit. Both typically feature short repayment periods and are ideal for companies that need extra cash flow to cover operating expenses or capitalize on a growth opportunity.

However, it is important to know what you’re getting into before pursuing this type of financing.

Interest Rates

When shopping around for inventory financing, it’s important to be aware of the interest rates that each lender charges. These can vary between a bank, an online lender or a specialty financing company. In addition, it’s wise to take note of whether a provider requires a down payment, is willing to finance startups or has a minimum credit score requirement.

Lenders that provide inventory financing typically assess each applicant’s financial situation to ensure they can repay the loan. Hence, they will look at factors like the company’s established year, sales forecast, and business history. Depending on these factors, some lenders may be more willing to offer more favorable terms while others are more cautious.

The type of inventory that a company will purchase with the loan may also impact its eligibility for funding. This is because the inventory purchased with the funds will be the collateral for the loan, and the lender would want to make sure that it is marketable. Moreover, the lender will want to ensure that it can sell the inventory quickly to minimize its losses.

Inventory financing can be offered as a term loan with fixed payments or as a line of credit that a business can draw against as needed. Most providers will finance up to 70% of the total value of a company’s existing inventory.


Inventory financing comes with different fees depending on the lender or financing company. It’s important to review each company’s requirements before applying for this type of loan. Some lenders may require a certain number of months or even years of business operations before approving an applicant. Others might have more flexible terms and accept startups and businesses with poor credit.

When it comes to getting inventory financing, the most important factor is proving that a company can repay the amount borrowed. Lenders will also look at the history of a company’s sales, its profitability, and its future projections. They’ll be concerned about the company’s inventory management system and will want to see reports on shipping and returns, invoices and account receivable, sale orders, and any other data that shows a firm is controlling its product inventory.

Another benefit of inventory financing is that it doesn’t require a personal guarantee from a business owner like other types of small-business loans. This eliminates the risk that a debtor’s personal assets, including their house or cars, could be at risk in the event of default. This makes it a good option for small businesses that don’t have much of a business credit score or aren’t able to secure a traditional loan. Those businesses can still create liquidity and increase their purchasing power with this type of financing.


Unlike unsecured business loans, inventory financing requires collateral in the form of the merchandise purchased. This makes inventory financing an excellent choice for product-based businesses such as brick-and-mortar and ecommerce retailers, as well as wholesalers. It can be particularly helpful for companies that have a seasonal sales peak and need to be able to cover their working capital during the slow season.

Compared to traditional business loan applications, the process of applying for inventory financing is typically much quicker and simpler. However, you will still need to provide a detailed and comprehensive financial overview in order to be approved for this type of funding. This will include all the necessary documents pertaining to your company’s assets, debts, and profits, as well as any future projections.

Lenders will also want to see that the merchandise you’re purchasing with the inventory loan is going to be profitable. After all, they will have to unload the inventory if you don’t pay back your loan and end up defaulting on it.

This is why lenders are particularly interested in the sales records of your company and how profitable you think it can be in the future. They may even consider your overall credit scores and business financials in addition to the value of your inventory. This is especially important because inventory depreciates over time, meaning that if you aren’t able to sell the inventory you buy with the loan, they will have to dispose of it.

Application Process

When applying for inventory financing, applicants will need to provide detailed documentation that includes a budget, an inventory list from their business’s inventory management system and sales projections. Lenders will also want to know the usual inventory turnover ratio and other financial information such as revenue and profit-and-loss statements. In addition, lenders will conduct a field audit of the company’s office space, facility or warehouse and examine the existing inventory.

Because the inventory serves as collateral, most lenders will not require a credit check or personal guarantee when issuing this type of funding. However, because it’s a debt-based financing solution, borrowers should consider the repayment terms carefully, particularly how they will affect their cash flow.

It’s important to note that not every business will qualify for inventory financing, especially small start-ups with limited or no existing inventory. In those cases, it may be more practical to apply for a service-based line of credit, or even a regular business term loan.

Similarly, businesses that already have existing inventory but need to replenish it during peak season or as part of their growth plan may benefit from invoice factoring instead. Invoice factoring is a debt-based funding option that allows a business to sell its outstanding invoices to an invoice financing company in exchange for immediate funds. The business can then use these funds to buy its own inventory or pay for other operating expenses.