What is Inventory Financing?

What is inventory financing?

Inventory financing is a funding opportunity that emerging and growing brands can utilize to gain access to much-needed capital. The concept is simple – it’s a type of financing that uses the inventory you already have on hand as collateral. With that, you can gain access to a loan that can be used to purchase more inventory to keep your proverbial shelves stocked. Inventory financing can solve the common cash flow problems many consumer goods brands face in the beginning- to mid-phases of brand growth.

Virtually all types of business, at one point or another, will experience at least some cash flow issues. There are many variables at play that can make running a successful business challenging – including waiting for customers to pay bills, handling seasonal upticks in sales, weathering unexpected small business expenses, and more. Staying afloat without exploring the types of inventory financing benefits out there can be hard. 

Though there are a number of options to choose from if you’re seeking funding – business loans from a small business financing company, credit card financing, personal loans, and more – business owners often feel stuck when they’re depending on the lenders that have been the traditional go-tos. Enter: inventory financing

How Does It Work?

Inventory financing is financing that borrows against your current assets – specifically your existing inventory. It means that you can take advantage of the inventory you’ve already purchased but haven’t yet sold. Using the inventory you have on hand as collateral, you can gain access to much-needed funds that will allow you to put money in your bank account and grow your business, without strapping cash flow.

Typically, inventory financing works best for small to medium size businesses. You should have a proven track record already, and you must have inventory on hand. Brands that see a seasonal increase in sales often find inventory financing to be a very beneficial, feasible option. By contrast, extremely large brands typically don’t use inventory financing due to the maximum amounts of money these loans tend to offer (which can be significantly short of a big brand’s needs). 

Is Inventory Financing Right For My Business?

While it can be an excellent option for many types of businesses, inventory financing is not for everyone. For example, a service-oriented business would not rely on a business line of credit or loan that relies on inventory. However, if you’re a consumer goods brand who has a busy season coming up and you have inventory in stock you can leverage, an inventory finance company could be a great option for you. 

Who Would Benefit From Inventory Financing?

Is inventory financing something you should consider? If you fall into any of the following categories, a loan or line of credit that’s based on your inventory may be something to look into. 

  • You are an existing business with an established client base and/or revenue
  • You are looking for a short-term loan 
  • You have a track record of purchasing inventory (and can prove inventory turnover)
  • You are a consumer goods based or retail business (you are not a service-only business that doesn’t have any physical inventory)
  • You have proven sales performance (you may consider an inventory business line of credit)
  • You are expecting an increase in sales for an upcoming busy season
  • You want be able to use your existing capital that’s currently earmarked to purchase future inventory
  • You want to expand your product lines
  • You need to stock inventory of top-selling products that are increasingly hard to keep in stock

Advantages of Inventory Financing

There are several advantages to inventory financing.

    • Liquidity: Adding more liquid cash to your business means you can rest a little easier about what the future may hold. While traditionally a large percentage of your cash flow may need to go towards inventory, instead you could leverage what’s just sitting in a warehouse or on your shelves and keep that cash in the bank for other business uses.
    • Bulk Ordering: Inventory financing can let you place a bulk order without draining the reserve you have in your bank account. Keep in mind, bulk ordering can also often result in significant discounts and price breaks as well as overall reduced shipping costs.
  • Growth: Planning to grow? Using your inventory as collateral means you can prepare for the next steps your business may be ready to take, without strapping yourself. Get to that next level without the risk of spending everything you have just to order more inventory.
  • Credit Score Flexibility: Even if you have a less than perfect credit score, all may not be lost. You still might be able to get an inventory-backed line of credit or loan.

What Do I Need to Apply for Inventory Financing?

Applying for inventory financing is simple and fast. Better yet, turnaround on approval is typically quick too, so you’ll have access to the funds you need to grow your brand in no time. We will need to see at least the following information:

  • Current inventory
  • A balance sheet detailing your capital, assets and any liabilities
  • P&L statements

Depending on your business and your needs we may also need to see some additional things like:

  • Business bank statements
  • Business tax returns
  • Inventory Management System (OMS) information and details
  • Your future sales forecast

Learn more about how to start the process and get the funds you need with inventory financing.

One response to “What is Inventory Financing?”

  1. Natalie C says:

    So helpful! Thanks for sharing this 🙂

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