How Does Inventory Financing Work & Is It Right for Your Business?

Inventory financing is essentially a line of credit that uses inventory (either a portion or all) as collateral. It allows businesses to tap into the value of their inventory, even though it may not yet be completely finished and in saleable condition (which can be the case in manufacturing), or simply hasn’t been sold yet. Once established, businesses can draw down their line of credit to pay for various expenses and investments, including purchasing new inventory (or the raw materials that will eventually be manufactured into finished and saleable inventory).

Using Inventory Financing to Increase Capacity or Buy Inventory

This above-noted aspect of inventory financing — i.e. the ability to use the loan to buy or build more inventory — is a key reason why this option is particularly valued by many newer and smaller businesses that “strike the jackpot” and get a major order from a big customer or the government. As soon as the euphoria dies down, the daunting reality sets in that they won’t be able to fill the order, because they don’t have enough capacity (inventory, staff, etc.) given their current cash situation. Instead of losing the customer and missing out on a highly profitable opportunity, they can leverage inventory financing and make the deal happen. Everyone wins.

The Costs of Inventory Financing

The costs of inventory financing depend on the agreed-upon interest rate (or rates if there are multiple tiers for different scenarios), and the amount of funds that are borrowed. This is significantly different than another popular type of asset-based lending product known as invoice factoring, in which accounts receivables are sold to a lender in return for a portion of their value. Customers then pay the lender directly.

Is Inventory Financing Right for Your Business?

Inventory financing might be a smart funding solution for your business if all of the following variables apply:

  • You exclusively or primarily sell products instead of services (if it’s the latter, then an unsecured line of credit, working capital loan, or merchant cash advance are probably better options).
  • You typically experience high inventory turnover, and need cash to replenish stock ahead of the next sales or production cycle.
  • You have a suitable inventory management system in place that provides accurate information regarding the size of your inventory, associated costs, and so on.
  • Your inventory and other relevant assets (e.g. equipment, storage racks, etc.) are in excellent condition.

Additional Considerations

Many lenders that offer inventory financing insist that borrowers have years of proven sales history and excellent credit. However, at National Business Capital our approach is markedly different: we’re far more interested in what business owners are doing today and what they have planned for their successful future, than we are about what may have transpired in the past.

That’s why we’ve approved numerous inventory financing loans over the years for businesses that only have a few months of sales history, and with impaired or bad credit (personal and/or business). In fact, our overall application approval rate across all of our funding products is around 90 percent. Compare this to big banks, where the approval rate is around 10-20 percent.  

Learn More

To learn more, contact our team today for your free, no obligation consultation. We’ll provide you with clear, objective information on inventory financing — and our other products and services — so that you can make an informed decision that is right for your business.

National Business Capital & Services is the #1 FinTech marketplace offering small business loans and services. Harnessing the power of smart technology and even smarter people, we’ve streamlined the approval process to secure over $1 billion in financing for small business owners to date.

Our expert Business Financing Advisors work within our 75+ Lender Marketplace in real time to give you easy access to the best low-interest SBA loans, short and long-term loans and business lines of credit, as well as a full suite of revenue-driving business services.

We strengthen local communities one small business loan at a time. For every deal we fund, we donate 10 meals to Feeding America!

About the Author, Megan Capobianco

Megan Capobianco is the Marketing Manager at National Business Capital & Services. Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.

Dislcaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advise from National Business Capital & Services and the author. Do no rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely in this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there maybe errors, omissions, or mistakes.