Inventory Financing Loans & Lenders

If your business is in retail, wholesaling, seasonal or a dealership, you must realize that the biggest problem you face is the financing of the inventory. You don’t want to tie up all your working capital, but if you can’t react to new trends, changes in the weather and fashion, you can’t compete. What you might need is inventory financing.

What is inventory financing?

Inventory financing involves a short-term loan or, more commonly, a line of credit that allows you to pay your suppliers while still having the cash to run your business. The important element is that the inventory you buy acts as collateral for the money you borrow.

How does inventory financing work?

Because the new inventory is the guarantee, it is almost certain that the lender won’t offer 100% of the cost. They have to think about what the inventory’s value might be if they have to sell it after the borrower has defaulted. Bearing in mind that this means liquidation value rather than market value, the common amount a lender will offer is between 50% to 80% of the total cost to you. You should note that if the inventory you want to buy will have little liquidation value, you may struggle to find a lender.

Many loan providers have a high minimum loan for inventory financing. Many have a threshold as high as $500,000 or even more. If this is a good fit for your business, that’s great, but there are plenty of inventory financing lenders who are prepared to deal with smaller companies. The higher the amount on offer, the more complex the application process is likely to be. In that situation, lenders don’t just consider credit scores and trading histories but will take into account the state of your storage facilities, inventory management systems, accounting procedures, and a lot more.

Inventory financing is generally not available for startups. Normally, lenders want to lend to businesses that have a track record, and who can blame them. If a business has no history of being able to sell, why would you lend it money? Crowdfunding and angel investors that fill that niche.

Who should be applying for inventory financing?

Anyone in the retail and wholesale sectors could well require inventory financing. Responding to sudden runs on a product, keeping ahead of trends, and reacting to marketplace changes mean that you need to be financially flexible. Inventory financing can provide that flexibility. How else can you stock up on the next must-have product, respond to the unseasonable weather, or react to the latest social media trend?

Most small to medium-sized businesses cannot afford to finance sudden changes in demand for inventory without help. They have to look toward loan providers to smooth out their cash flow and take advantage of the sales opportunities offered. Without extra finance, the chance of capitalizing on a changing marketplace would be missed.

What are the requirements for inventory financing?

While the inventory that a business buys becomes the collateral, this doesn’t mean that a loan's requirements are not exacting. Among the things a loan provider will examine are:

• A credit report and personal credit check for the business owner
• Financial records showing sales history and revenue
• Ascertaining that the supply chain is fit for the purpose
• Investigating if there are any complaints with the Better Business Bureau
• An accurate list of the inventory to be purchased
• A well thought out business plan

What are the pros and cons of inventory financing?

In the end, it is up to the business owner to decide for himself or herself whether or not inventory financing is the best fit for their business. If you do choose to apply for inventory financing, then look at all the options. Don’t forget that a loan is a loan and not something to be entered into lightly. Nearly all businesses require outside finance at some time or another, and inventory financing is just one aspect of this. Let’s look at the pros and cons of inventory financing:

Pros

• Inventory financing offers the flexibility that a business needs to adapt to a fast-paced, changing marketplace. No one wants to run out of a “hot” product. If you don’t have the capital that can meet the demand, then inventory financing bridges that gap. Inventory financing allows your business to capitalize on sales opportunities without your ability to operate being compromised.
• Traditional loans typically require collateral, which means it is often the case that the business owner’s home and property are at risk. Okay, you are certain that your business will come through, but no one can entirely relax in that situation. Inventory financing removes this worry. Should the worse happen, then you only lose the remaining inventory. Your house and car are safe.
•  Few businesses run completely smoothly. Inventory financing can help smooth out the highs and lows of a normal trading period and make certain you have the right products at the right times.

Cons

• The requirements and conditions for securing inventory financing are often rigorous and sometimes difficult to meet. There is a possibility you won’t fulfill the criteria and won’t qualify for inventory financing. If that’s the case, you will need to look elsewhere.
• Obtaining inventory financing is not particularly fast, while inventory is often time-specific. It may be that companies that offer inventory finance cannot react quickly enough to your needs, and you miss out on a sales opportunity.
• Anyone offering inventory financing has to consider the risk, especially with the relatively short time scales involved. The borrower often has to accept the corresponding high-interest rates that may be involved. This is not always the case; it is something to be aware of and look out for.

What are the types of inventory financing?

There are two main types of loans involved with inventory financing, with the idea that the inventory acts as the collateral common to both. Some finance providers offer short-term loans while many operate on a business line of credit model. Let’s look at them in more detail:

1. A term loan is the sort of financing we are all familiar with. The lender gives you a sum of money to buy your inventory and a fixed period to pay it back, plus interest. You repay the loan with regular repayments. In the case of a loan for inventory, the term is usually a short one, 12 months at the most.
2. A line of credit is the most common form of inventory financing. You can think of a line of credit as operating in a similar way to a business credit card. The finance company agrees with you on a maximum limit, but you are then free to spend as much or little of it as you need for the inventory you wish to buy. Often this is a rolling line of credit so that as you repay the amount, you have borrowed cash is available to you once more. The big advantage is that you are only charged interest on what you borrow. For instance, if you have a line of credit for $75,000 but only buy $30,000 worth of inventory, you only pay interest on the $30,000. A line of credit is a much more flexible form of finance than a term loan and is preferred by many for this reason.

In both instances, the inventory is yours to sell so long as you keep up the repayments. However, should you default, the loan company has the right to seize the inventory and sell it to recover its money.

Although the term loan is easier to understand, it is often not the best option. A rolling line of credit allows much more freedom as once agreed, you can dip into it as and when you like, minimizing the interest for which you are liable.

What is an example of inventory financing?

If you are a car dealership and need to react to an unexpected upswing in car sales, you need to order more cars from the manufacturer. Cars are expensive, and it is unlikely that you want or are even able to tie up so much of your capital. The answer is to take out an inventory loan or line of credit.

As mentioned above, the finance company will only offer you a percentage of the vehicle’s cost. Their assessor will estimate the liquidation value of the cars, perhaps three-quarters of the price you are paying, and the lender will give you a percentage of that. The actual figures will vary depending on which loan provider you approach. As you sell the cars so you can repay the loan or, in the case of a line of credit, possibly buy more inventory.

How do you apply for inventory financing?

How you apply for inventory financing depends entirely on the lender. If it is a traditional bank, it is likely that you will be faced with quite a long, drawn-out application process involving lots of paperwork, inspections of your storage facilities and inventory management systems, and a lot else.

On the other hand, many internet-based finance companies have a streamlined application procedure coupled with a fast appraisal process, letting you know quickly if you qualify for finance or not.

As a business owner, you need to decide whether inventory financing is what your business needs and then examine all the available options. This may well take some time and energy, but you must understand exactly what a lender is offering and how much it is going to cost you. Sometimes, because of the risk to the lender involved, interest rates can be quite high.

The best option could be to use PrimeRates. Our application process takes minutes and won’t affect your credit score. If you qualify, we will offer you the lenders’ offers that are best suited to you and your situation. The cash could be available to you in days.

If you’re a business owner whose revenue depends on buying and selling items, you might have to take out a loan at some point to fund new purchases that can’t be made out of pocket. That’s where inventory financing comes in. This form of business financing allows business owners to borrow the cash that they need to replace or replenish their stock, while also allowing them to use the items that they’re purchasing as collateral for the loan.

What is inventory financing?

Inventory financing is a form of borrowing that allows businesses to work with lenders to fund purchases and investments in products that the business owner intends to sell. Much like equipment financing, inventory financing often allows the borrower to use the products that they’re purchasing as a form of collateral, instead of their personal assets or other assets associated with their business.

Can inventory be used as collateral?

One of the major benefits of using inventory financing to pay for material purchases is that borrowers can use the merchandise that they are purchasing as the collateral for the loan that they’re taking out.

Are collateral loans a good idea?

Loans that require borrowers to put down their homes or other personal assets as the collateral can be highly risky for business owners who are unsure of their ability to repay the debts. Using inventory financing can be a viable alternative to typical funding that requires collateral, because it allows the borrower to avoid risking their personal assets. However, whether you’re using your inventory or your home as collateral, you should make sure that you are able to repay the loan before signing the agreement.

What are some examples of collateral?

While businesses can use their inventory as collateral, other forms of financing may require a home, a car, a business’ property, or machinery to be used as the collateral for a loan.

What is the difference between an inventory loan and line of credit?

The entirety of a loan is distributed as one lump sum, while a line of credit is accessible to borrowers in increments. A loan might be better for replacing one batch of inventory that might have been destroyed in an unexpected event, while a line of credit is a better option for funding cyclical merchandising expenses.

How to qualify for an inventory line of credit or inventory loan

Product based: Businesses who are operating in wholesale, food, distribution, manufacturing or retail are the best candidates for inventory financing.

Length of time business has been active: Businesses should have at least one year in operation to qualify for the majority of inventory financing options.

Minimum general requirements: Due to the extra time that the process takes to evaluate an application for inventory financing, some lenders may require that you’re purchasing a minimum monetary amount of a product before they’ll consider you. Additionally, minimum credit and revenue requirements will likely apply.

Financial records: When you apply for an inventory loan, the lender will also take a look at your business’ financial, inventory and sales history.

How to apply for inventory financing loans

Before applying, you’ll need to have a few essential documents ready:

• Balance sheets
• Profit & loss statements
• Personal tax returns
• Business tax returns
• Sales forecast
• Inventory management records
• Inventory list
• Business bank statements

Inventory lines of credit options

StreetShares - lower rates

StreetShares offers loans and lines of credit of up to $250,000, with rates as low as 9% for highly qualified borrowers.

Accion - great credit

Accion’s loans range between $300 and $1 million, with rates as low as 7% for well qualified borrowers with excellent credit scores.

Pros:

• Wide range of loan amounts
• Some of the lowest rates in the industry
• Quick to fund
• Online application process
• Easy for new businesses to qualify, with a minimum time in business requirement of just six months

Cons:

• Difficult for low-credit borrowers or new businesses to qualify
• Potentially high rates
• Potentially inflexible repayment terms

Kabbage - quick capital

Kabbage offers lines of credit ranging between $2,000 and $250,000, with rates starting at 24% and a maximum of 99%. Despite its potentially high rates, this lender offers fast cash, with funding times as short as 24 hours.

Pros:

• Quick to fund
• Large credit amounts
• Easy online application
• Easier for new or low-credit borrowers to qualify

Cons:

• Potentially high rates
• Potentially inflexible repayment terms

BlueVine - new businesses

BlueVine’s offers lines of credit ranging between $5,000 and $250,000, with APRs starting at 15% and a maximum rate of 78%. This lender works with new businesses as well as owners who have credit scores below 600.

Pros:

• Quick to fund
• Large credit amounts
• Short, easy online application
• Easy for new businesses or low-credit borrowers to qualify

Cons:

• Potentially high APR
• Potential for very short repayment terms

Inventory loan options

Credibility Capital - great credit

Credibility Capital offers business loans with amounts ranging between $50,000 and $400,000 and a maximum annual percentage rate of 25%. Because this lender offers rates as low as 10%, the company primarily works with borrowers who have excellent credit scores, multiple years in business and high annual revenue.

Pros:

• High loan amounts
• Low rates
• No prepayment fee
• Holistic application evaluation process

Cons:

• Bad for low credit borrowers
• Maximum loan term of just three years, even on the lender’s largest loan amounts
• UCC-1 filing requirement
• Personal guarantee possibly required

OnDeck - quick approvals

OnDeck offers funding with amounts ranging between $5,000 and $500,000, and rates starting at 9.1% with a maximum of 99.8%. This lender can be a good option for borrowers who have low credit scores or need fast cash, as OnDeck loans can fund in as little time as 24 hours.

Pros:

• High loan amounts
• Easy, online application
• Funding in as little as one day
• Potentially low APR
• Easy for borrowers with bad credit to qualify

Cons:

• Potentially high APR
• More frequent repayment than with standard business loans, with payments being made on a weekly or daily basis
• UCC-1 lien and personal guarantee required

Conclusion

Inventory financing provides a good funding option to business owners who want to fund their merchandise purchases without using their personal or other business assets as collateral. If you’re considering taking out an inventory loan or line of credit, first make sure to evaluate whether you need a one-time loan or if the cash is to fund cyclical expenses. Additionally, even if you have low credit or are operating a new business, it’s important to evaluate multiple offers before deciding on the financing that’s right for you.

Compare Business Loans