What Is Inventory Financing?

Inventory financing allows businesses to obtain funds to purchase inventory and stock up on products to sell. It is an important funding option that gives companies the working capital needed to meet customer demand and avoid costly out of stock issues. For product-based businesses with growing or fluctuating sales, inventory financing provides flexibility to scale inventory as needed.

What is Inventory Financing?

Inventory financing refers to obtaining a business loan or line of credit that is used specifically to buy inventory. The purchased inventory serves as collateral for the loan, so separate assets don’t need to be put up.

There are two main types of inventory financing:

• Term Loans - This provides a lump sum upfront to be paid back in fixed installments. Term lengths tend to be short-term, around 3-12 months.
• Lines of Credit - A revolving credit line that can be accessed as needed. Only interest accrues on the amount drawn down. There are typically fewer restrictions on how funds are used.

Inventory financing allows flexibility in buying inventory as needed, without paying upfront or tying up working capital. It can be an ongoing solution to maintain sufficient product stock.

Benefits of Inventory Financing

There are many advantages to using inventory financing over other types of small business loans:

• Meet Customer Demand - Inventory financing allows you to stock up on best-selling goods or prepare for busy seasons when demand spikes. This helps avoid lost revenue from out of stocks.
• Fewer Restrictions - Inventory financing tends to offer more flexibility in how funds are used since inventory itself secures the loan.
• Tax Benefits - Interest paid on inventory financing may be tax deductible. Also, you aren’t taxed on profit from unsold inventory.
• Prepaying Costs - Paying upfront for large inventory orders can avoid price increases from manufacturers over time.
• Quick Funding - Lenders can often fund within a few business days so inventory orders aren’t delayed.

Who Should Use Inventory Financing?

Inventory financing works for most product-based businesses that need to maintain sufficient inventory, especially those with fluctuating supply needs.

Examples include:

• Retailers - To prepare for sales spikes during holidays or other peak seasons. Allows stocking up on best-selling merchandise.
• Wholesalers & Distributors - Funds purchase of products to hold in warehouses before selling to retailers. Useful for taking advantage of volume discounts.
• Manufacturers - Enables buying extra raw materials required to manufacture goods according to rising customer orders.
• Seasonal Businesses - Allows stocking seasonal retail products well in advance of busy periods. Useful for outdoor recreation companies, holiday decoration shops, etc.

Getting Inventory Financing

If inventory financing makes sense for funding inventory growth, the next step is getting qualified and applying with a lender.

Application Process Step-by-Step

Applying for inventory financing includes:

• Choose a Lender: Compare financing rates and fees across online lenders and banks. Also confirm qualification criteria fit your business.
• Gather: Tax returns, bank statements, inventory lists, accounting records showing sales and inventory metrics over time.
• Apply: Complete loan application providing business details, amount requested, purpose of funds.
• Review: Lender analyzes business performance measures and inventory collateral value.
• Site Inspection: Many lenders will inspect on-site storage locations and stock.
• Approval Decision: You will receive an initial interest rate and term offer if approved.
• Finalize Agreement

Alternatives to Inventory Financing

Other business funding options besides inventory financing loans that allow purchasing inventory include:

• Business Credit Cards - Revolving line of credit that works similarly to personal credit cards and convenient for smaller purchases. But interest rates tend to be considerably higher.
• Business Lines of Credit - Also provides a revolving credit line, but may offer better rates for larger financing amounts compared to credit cards. However, less flexibility in what funds can be used for.
• Invoice Factoring - Selling unpaid customer invoices to a lender provides funds that could be used for inventory. But factoring fees can diminish ROI.
• Purchase Order Financing - Receives funding to fulfill customer purchase orders. Requires sharing payment control and grapples with high finance rates/fees.
• Traditional Bank Loans - Can provide larger upfront funds for inventory, but qualified through strict underwriting. More restrictions on usage requirements.

For retail, wholesale, distribution, manufacturing and other product companies - inventory financing is often the most flexible path to funding inventory growth when needed.

Conclusion

Getting fast access to capital that can quickly be invested in acquiring more sellable inventory allows businesses to say yes to unexpected orders and prepare for projected upticks in seasonal demand. Inventory financing offers an efficient way for stores and other merchants to scale up product stock, avoid costly stock-outs that lose sales, prepare for growth periods. While qualification requirements exist, inventory financing terms are often more favorable relative to other financing options. Companies interested in exploring working capital loans for funding inventory purchases are encouraged to review lenders specializing in this type of business financing.