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Inventory Financing for Small Business

By Elise Moores Managing Editor at Fast Capital 360 Reviewed By Mike Lucas

Many small business owners turn to inventory financing when their current working capital doesn’t cover product purchases outright. Here’s what you should know about the types of inventory-based loans, how they can benefit your business and how to apply for inventory funding.


What Is Inventory Financing?

Inventory financing is any type of loan, line of credit or other funding solution that small businesses use to purchase products and stock. This type of lending is helpful for product-based businesses such as retailers and wholesalers. 

Inventory business loans can help you buy stock in bulk, take advantage of a discount from a vendor or make inventory purchases during seasonal cash flow shortages.

How Inventory Financing Loans Work

The products a business buys with inventory funding act as collateral to secure the financing. Similar to equipment financing, inventory financing loans open opportunities for small businesses that might not have assets to secure other types of funding.

During your repayment period, the inventory is yours to sell. The revenue you generate repays your loan. Consequently, lenders assume the risk when products don’t sell. If a borrower misses payments or defaults on the loan, the lender will repossess and liquidate the products to recoup the money.

Because of the risk, inventory financing companies rarely (if ever) finance 100% of the value of the products. Instead, you’re more likely to receive 50%-80% of the liquidation value, which may be less than the initial purchase price.

Related: Secured Business Loans


Types of Inventory Financing

If you think inventory financing is the best option for your business, there are 3 types to consider: an inventory loan, an inventory line of credit or vendor inventory financing.

Inventory financing is secured by on-hand or to-be-purchased inventory. Borrowers pay lenders back with the proceeds of inventory sales.

Inventory Loan

With an inventory loan, you’ll receive funding from a lender to finance your inventory purchases. Given the typically high turnover rate for retail inventory, getting a short-term inventory loan rather than longer-term inventory financing loans is more practical.

You can obtain inventory business loans through banks or alternative lenders; rates and terms will depend on the lender, the inventory’s liquidation value and, in part, your creditworthiness and business’s financial picture.

Inventory Line of Credit

An inventory line of credit provides borrowers with a pool of funds from which they can draw. The company’s inventory (on-hand or to be purchased) secures the credit line. 

Inventory credit lines are often revolving, with the line replenishing as you pay back what you’ve borrowed. 

Related: How to Get a Business Line of Credit (Plus Where to Look)

Vendor Inventory Financing

Rather than obtaining financing through a lender and then purchasing your inventory, this type of inventory lending is directly handled between you — the business owner — and your vendor. 

There are 2 types of vendor inventory financing:

Debt Financing

  • Vendor loans money that you’ll use to purchase inventory 
  • You can repay the loan, with interest, with your sales revenue

Equity Financing

  • The vendor supplies their goods in exchange for stock in your company 
  • While you won’t have to repay them for the cost of the inventory, your vendor will become an equity shareholder in your company — meaning they’ll have a say in future decisions the company makes

Pros and Cons

✔ Vendor inventory financing is a good option for businesses that either don’t qualify for other funding options or don’t want to incur debt from a lender. 

✔ It can also help build a relationship between you and a vendor. 

✖ However, interest rates from vendor debt financing can be higher than what you’d get from a lender.

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Inventory Financing Rates

Inventory financing rates will vary based on whether you get a loan tailored for buying stock or use another type of funding solution to accomplish your goal.

There’s an increased risk with inventory lending, meaning interest rates will be higher. This is because lenders have to try and get value for your products if they need to sell them, but that can be difficult. Increasing interest rates are a way to mitigate that risk. Therefore, it isn’t uncommon for inventory financing rates to be in the teens or exceed 20%.

Other inventory business loans and lines of credit can have lower rates, but they can require additional collateral to secure the financing. You’ll have to determine your priorities when choosing which funding option you think is right for your small business.


Inventory Financing: Pros and Cons

As with other funding options, inventory financing has advantages and disadvantages. 

Let’s break them down.

Inventory Financing Pros

Helpful for Seasonal Businesses

If you want to buy inventory for a seasonal retail store, you may not have the cash flow upfront to get what you need.

For example, a garden center will make most of its money in the spring and summer months, when people are looking to beautify their outdoor spaces. This means they need to have inventory on hand to meet the demand, but they may not have made enough money during the slow months to purchase sufficient stock.

That’s where inventory business loans come in: You can supplement your own working capital to buy the inventory you need to satisfy customer demand.

Renewable Funding Source

A business line of credit is a versatile funding solution for businesses with ongoing working capital needs. When used as inventory financing,  it can be a renewable source of income for a growing retail operation.

Since you can withdraw more funding after paying off what you borrow from inventory financing lenders, it’s an appealing re-upping solution for retail businesses.

No Risk to Personal Assets

While it’s possible to get unsecured business loans, most lenders need some type of collateral to approve a loan. This often means a business owner’s personal money, vehicles or even one’s house can be at risk.

Since inventory business loans use the products themselves as collateral, you won’t have to worry about losing any personal assets as with other options (unless you’ve signed a personal guarantee).

Less Emphasis on Credit Score

Lenders often check your personal and business credit scores when reviewing your financing application. However, because products secure an inventory business loan, your credit score won’t be as much of a factor to lenders. 

Your ability to repay the loan directly correlates to how well you can sell the product, so that’s the main focus. While it isn’t easy to secure a loan with poor credit, you won’t need a score of more than 700 just to be considered.

Inventory Financing Cons

Although the advantages are attractive, there are a few reasons why inventory financing isn’t the best option for some businesses.

Higher Rates

Lenders mitigate their risk by increasing interest rates on an inventory loan. These higher rates can make this type of financing more costly. While financing options have rates lower than 10%, rates range up to 99%, depending on the lender.

Note: Your products have a lot to do with the interest rates you get on these loans. If the inventory won’t hold value or is difficult to liquidate, rates can be steep.

Shorter Terms

Lenders always want to minimize their risk, so you’re likely to receive a short-term length on your inventory loan. Products will be liquidated in case of default, so offering term lengths between 6-12 months means lenders are less likely to be stuck with outdated items they can’t sell.

Shorter terms can be a boon for those who don’t want to lock up their capital long-term, but it also raises payment amounts.

Stricter Approval Standards

Inventory financing lenders are unlikely to offer you funding if they don’t think the product will sell based on your industry, sales or demand. The need for lenders to minimize risk also leads to restrictions on uses for an inventory loan. Products that will quickly become outdated or difficult to liquidate are unlikely to qualify.

Some examples include computer equipment that isn’t up-to-date with the latest technology, perishable products and some seasonal items unlikely to have future value, like New Year’s Eve decorations with the current year printed on them.

Longer Business History Preferred

Inventory financing companies like to see businesses with a pattern of being able to sell inventory quickly and with a solid profit margin. You’ll usually need at least a year in business to prove that. If you need funding with less than a year in business or if you’re looking for a startup inventory loan, you’ll have to explore other financing options.

How Much Can my Business Qualify For?

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How to Get Inventory Financing

1. Compile Your Financial Documents and Business Information

When applying for an inventory financing loan, lenders will want assurances that you have a healthy inventory turnover. Have the following information on hand to give your lender a full view of your small business finances and operations:

  • Balance sheets
  • Profit and loss statements
  • Sales forecasts
  • Cash flow statement 
  • Personal and business tax returns
  • Bank statements (at least the past 6 months)
  • Inventory lists and management records
  • Personal information and information about any co-owners or other business partners

2. Complete and Submit an Application

The application process will vary from lender to lender. Conventional lenders, such as banks and credit unions, have a lengthier application process and will ask you to submit a large portion of paperwork and documents. You might also have to meet with the lender before approving your application.

If you go to an alternative lender, you’ll fill out an application only online, and the entire process can take only minutes.

3. Await Final Approval and Make Your Decision

Your total wait time from application to approval depends on the lender. Conventional lenders can take several weeks or even more than a month to vet your application thoroughly. 

Alternative lenders, in contrast, can approve applications in days and sometimes grant same-day funding. However, note that using inventory as collateral in your loan means that lenders might perform an audit of your business’s sales and inventory operations.

If you end up being approved for an inventory loan, you can then assess the terms of the agreement. Make sure to consider the annual percentage rate of the loan before signing.


Inventory Loan Alternatives

Loans secured by inventory aren’t the answer for every small business.

The following are some popular alternatives.

Short-Term Loans

As the name suggests, short-term loans are similar to term loans but with shorter repayment lengths. Instead of having years to pay back your loan, these loans can have terms as short as 3 months. Short-term loans can be used for any business need, including for the purchase of inventory. 

The shorter repayment terms mean businesses with less than excellent credit can find better chances of approval. Many online lenders offer short-term loans, making it a great inventory financing option for small businesses that need money quickly.

Apply now

Merchant Cash Advance

This type of financing isn’t a loan but, as the name notes, funding loaned against future sales. Some lenders, such as partners with Fast Capital 360, could approve up to $500,000 in merchant cash advance financing for inventory purchases. You’ll repay the advance through a percentage of “holdbacks” of future sales in daily or weekly installments or through Automated Clearing House (ACH) withdrawals.

Apply now

Accounts Receivable Financing

Use your accounts receivable for inventory financing if you’re experiencing a cash flow gap waiting for customers to pay their invoices. Lenders will advance a percentage of your accounts receivable — sometimes 80% or 90% of their value — and you’ll receive the remaining balance (minus lender’s fees) once the customer pays their bill.

Apply now

SBA CAPLines

If you’re looking to buy inventory for a retail store or other small business that has seasonal sales increases, the Small Business Administration’s Seasonal CAPLine is for you.

This SBA inventory financing option, which is part of the 7(a) loan program, works as a business line of credit, with a maximum of $5 million. They can be used to purchase inventory to meet the need of an upcoming busy season. Maturity lengths can go up to 10 years, making them a great choice if you prefer a long-term commitment.

Business Lines of Credit

If you need inventory financing immediately or don’t have the creditworthiness to be approved by the SBA, you can still receive a business line of credit from alternative lenders.

If you choose to go this route, you can withdraw funding from the line of credit in the future to cover operating costs other than inventory. That versatility could be beneficial for growing small businesses.

The speed and accessibility to funding that online lenders offer makes business lines of credit attractive.

If you go through an online lending marketplace such as Fast Capital 360, you can have one application sent to multiple lenders. This cuts out the time you have to spend filling out applications. 

Qualification requirements also are much lower than SBA, bank and inventory loan lenders, opening up doors for businesses with lower credit scores.

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