Inventory Financing is:

“… a revolving line of credit or a short-term loan that is acquired by a company so it can purchase products for sale later. The products serve as the collateral for the loan.”

At their core, these are secured loans.

Inventory financing can sometimes be hard to get because inventory depreciates.  As security, it’s basically on the clock.  If it depreciates to the point of not being worth the amount of the loan, it is worthless as security.  There is also the idea that it may be a fad that is going to quickly go out of style, also not selling.

After the hard economic downturn of 2008, lenders are much stingier with this type of small business financing. During that time, it was painfully evident that, if a loan was secured by non-staple items, there could be trouble.

Non-necessities do not sell well in a recession. If you can’t sell, the bank cannot either. That means the security is pretty much worthless.

There are some things you can purchase with small business inventory loans that may surprise you.  For example: 

• If you run a dining establishment, you can use inventory loans to buy flatware and linens in addition to food supplies. 

• If you run a salon, you can use this type of financing for towels and supplies as well as items to sell. 

• A clothing store may use the funds for shoes, accessories, and other items. 

 The point is, you can use this financing to purchase items that are not specifically inventory in terms of things that you sell to the public.  You can also use this financing to purchase supplies for any services you may offer

There are two main types of inventory financing. They are an inventory loan and an inventory line of credit.

Both types of inventory financing are secured by leveraging your inventory as collateral. Still, these two loan types mean different things for the future of your business financing.

This is a loan based on the value of your inventory. Like a regular small business loan, an inventory loan is for a set amount to be paid back in monthly payments over a fixed repayment term or in a lump sum following the sale of inventory.

You will be responsible for paying back the full loan amount. Once the loan is paid off, you will have to take out another small business inventory loan if you need more financing.

Funds from a loan can only be used once. But an inventory line of credit can provide you with extra money on an ongoing, as-needed basis. A business line of credit can help business owners handle any unforeseeable expenses that may come up.

Since these loans are secured by the inventory, lenders can put less of an emphasis on business credit history or credit score and other indicators of creditworthiness.

This can make inventory financing easier to obtain for businesses that cannot get funding through a regular business loan, such as a working capital loan. This method of financing can also be faster to apply for and easier to get than a business loan.

Inventory financing can be more expensive in the long run versus cash inventory purchases due to interest. This is the case even if the interest rate is low. Although inventory financing can be secured by the inventory itself, in some situations the lender may ask for an additional form of collateral.

A lender may want to come out and see your facility in person to make sure the financed inventory is being taken care of so it won’t be damaged or depreciate in value before sale. Often, such, onsite visits involve an appraisal fee you will be responsible for paying.

Inventory financing for small businesses will hinge on the liquidation value of the inventory and its sale in the near future. During the application process, lenders will want to see proof that you have excellent inventory turnover and are able to actually sell the inventory. This means that lenders want to see that you have an excellent inventory management system in place. This is so they don’t have to worry that you might be buying more inventory than you need and can sell.