Inventory Financing: A Guide to Inventory Lending


Small business owners who need working capital to buy inventory but don’t have any assets to put up as collateral may overlook a potential resource that can help them: the stocks they want to buy.

What is inventory finance?

With inventory financing, the supplies, materials, or products you purchase are your collateral, which secures the loan. Short-term loans and inventory lines of credit are designed to provide quick access to cash flow to purchase inventory.

How do inventory loans work?

Borrowers looking to purchase inventory but do not have all the capital required to place an order can purchase inventory financing from lenders who specialize in this type of business financing.

Typically, you can borrow about half the value of the inventory, so you’ll still need to be able to afford the rest.

Your loan is secured by the inventory you buy. This means that if you are unable to repay the loan, the lender has the option of entering the inventory to cover your debt. You’ll pay off your loan just like you would any other, with monthly payments of up to one year that include fees, interest, and principal.

Advantages and Disadvantages of Inventory Financing

Of all the loan options available, there is none as well suited to buying inventory like this. Still, there are downsides to consider.


Inventory gives you the capital you need to quickly cover business expenses related to inventory purchases. If you’ve taken out a loan from a traditional bank, it may take weeks or months for your application to be approved. Inventory financing is done quickly.

The inventory you buy can help you boost your business during a lean season when you may not have the cash on hand to make inventory purchases. Then you can repay the loan during your peak season.

Another advantage is that even though you do not qualify for other types of financing, you may be eligible for stock loans. So, if you are running a startup that has been turned down for a bank or SBA loan due to your lack of credit, know that this can still be an option.

The inconvenients

The first downside to consider is that you can have a higher interest rate with inventory loans than you would with other types of business loans. If you qualify for lower rates with traditional bank loans, consider these first.

In addition, these loans are usually short term loans and must be repaid within a year. If your budget cannot support this expense, you might find yourself in hot water.

Finally, you cannot use these loans for anything other than inventory.

What are the types of inventory financing?

There are several lenders who offer different types of business inventory financing to consider.

Inventory line of credit

If you’re not looking for a lump sum to buy inventory, consider a business line of credit. You are approved for a certain credit limit, but you can borrow up to that full amount and pay it off. This is great if you have ongoing inventory buying needs.


Some finance lenders specialize in inventory factoring. In this case, you sell your purchase orders or accounts receivable to buy the inventory you need to fulfill the order. The lender takes a fee.

Credit card

Another financing option, while not specific to purchasing inventory, includes business credit cards. It is a form of revolving line of credit that you can use to purchase inventory, office supplies, and other items in stores and online.

Merchant cash advance

While not a type of loan, a merchant cash advance can help you get the new inventory you need if you don’t have good credit and can’t qualify. to other financing options.

Where to find inventory financing

There are online lenders that specialize in financing stocks. Start by asking for recommendations from others in your industry. Most banks do not offer inventory loans.

What’s the best way to fund inventory?

The best way to finance stocks is to find a finance company that offers terms that you are comfortable with. Take into account what fees or interest you will pay and how quickly you will need to repay the loan.

Do your homework to find out how the company performs in terms of customer service. You don’t want to get a low rate loan if you can never get to customer service on the phone to answer questions.

If you are able to pay off the loan faster, can you save money or is there a prepayment penalty? Ask lots of questions before you land on a lender.

What is the cost of financing the inventory?

Like any small business loan, inventory financing options come at a cost. Most charge interest, and depending on your business and personal credit, these rates can vary wildly. The better your credit, the lower the rate and the reverse is also true. If your credit scores are poor, you will pay a lot more to get the loan.

How to qualify for inventory financing

Before applying for an inventory finance loan, check your business and personal credit scores. If you don’t have a business credit history, lenders may take a closer look at your personal scores, so make sure they’re up to par.

Unlike bank loans which require collateral, you will not have to provide any business or personal assets for the loan. You may be asked to provide order details on the inventory you are looking to purchase so the lender knows the value and can determine how much to lend you.

How to get inventory financing

The inventory financing application process works differently with different lenders, but usually doesn’t require much more than a few details about your business, how long it has been in operation, and your annual income. You may also be asked for details about the inventory you are looking to purchase.

Based on the value of the inventory you wish to purchase, the lender will determine the amount of money they will lend you. If approved, you will sign the loan agreement, which includes your loan amount, interest rate, and repayment schedule. Your funds will be deposited into your business bank account in less than a day.

Nav Verdict: Inventory Funding

If you don’t have the capital to buy any commodities or commodities on hand, it’s good to know that there are small business financings like inventory loans and lines of credit to help you!

This article was originally written on December 21, 2021.

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