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

Whether you sell cars, operate a convenience store or own a restaurant, having inventory on hand is what gives you the ability to do business—and ultimately, drive revenue. But unfortunately, acquiring new inventory isn’t always as simple as the click of a button. When working capital doesn’t cover the costs, inventory financing gives you a way to purchase new materials or products—without laying out all the cash upfront.

Here’s what you need to know about how inventory financing can help your business grow.

inventory financing

What is Inventory Financing?

Simply put, inventory financing is a financing product that allows you to immediately purchase new inventory, while utilizing existing inventory as collateral. 

By putting up inventory as collateral for the loan (which is technically financing), you can receive cash right away. Because your inventory itself functions as collateral, you won’t have to put up other assets to receive funding. This means that if you default on payments, the lender can seize your inventory as payment.

Because of this, inventory financing allows businesses to tap into the value of their inventory, even when it hasn’t’ yet been sold. 

Manufacturing and other companies that don’t have ready-to-purchase goods, but instead have raw materials, can also get financing based on these raw materials.

Rather than providing financing for the inventory’s full value, lenders will generally finance anywhere from 50-80% of the total cost. 

How Using Inventory Financing Works: Increasing Capacity or Buying Inventory

In a pinch, inventory loans (which technically aren’t loans) could be the difference between missing out on and being able to pursue a huge opportunity in your business.

If your busy season is approaching and you have an opportunity to drive sales, but no working capital to purchase products (or other inventory), then financing can give you the resources you need to do so.

For small business owners that just started the journey, inventory financing could be a game changer. If a large order comes in, and you lack the inventory to fill it, then you can utilize your inventory to buy the necessary materials. By doing so, you can capitalize on demand, instead of turning down orders due to a lack of working capital.

Or, to maximize sales during a busy season, you can finance your inventory. This allows you to receive extra cash, which you can use to purchase additional inventory, and ultimately, increase sales.

When you receive cash, your use of the funds isn’t limited. While many business owners purchase inventory, you can also put that cash toward other business expenses, like payroll, operating costs, or other costs your company may incur.

Inventory financing helps your business under normal circumstances, too. In every scenario, it’s a quick and easy way to utilize your existing assets to generate higher revenue, while knowing that you’ll generate the necessary income.

The Costs of Inventory Financing

How much does financing inventory cost?

Unfortunately, there’s no quick and easy answer to this question—the cost will vary for every business. Ultimately, the cost is based on the value of the inventory being collateralized, how much cash you receive, and other details about your business’s financial history, like your annual sales, credit score, and more 

If you qualify, you’ll have an agreed-upon interest rate. Then, you’ll pay back the full amount that you received, plus that interest based on the funds 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. In this structure, customers then pay the lender directly.

An Example In Action

Still looking to understand how inventory financing could help your small business?

Say that you own a local hardware and home improvement store, and it’s February. At the moment, things are slow—but spring is right around the corner. Soon, people will be lining up to buy mulch, trees, plants, and other landscaping materials and supplies. And not to mention, once the warmer weather kicks in, home improvement projects will pick up too.

But because you’re in the midst of February, the slow season, cash flow is down and working capital is spread thin. In other words, you can’t afford to purchase stock in the quantities you want to. 

That’s where inventory financing comes in. Instead of missing the opportunity to land higher sales come spring, you can finance your existing inventory to obtain cash. When demand peaks, you’ll have enough inventory on hand to earn a huge profit, and buy more inventory with that cash.

Is Inventory Financing Right for Your Business?

If your small business is in the market for extra working capital, there’s no shortage of options. You can apply for:

Depending on the type of business and what you’re looking to accomplish, inventory financing may or may not be the right route.

The Benefits of Inventory Financing 

  • You mainly sell products: Because of how inventory financing programs are structured, there’s no more direct way to capitalize on unsold inventory.
  • Products sell at a fast pace: The faster your inventory turnover, the more sense it makes to finance that inventory for quick cash. 
  • You have detailed records: If your inventory management system can track inventory costs, quantities and turnover times, this might help give you a better understanding of how it will work on your end.
  • Preparing for a busy season ahead: If you know the next few months will bring lots of sales, and want to maximize those sales, then inventory financing might be the right move. 
  • You have a lot of inventory on hand: For this type of financing option, inventory acts as collateral. So the more inventory you have on hand, the more cash you can obtain. 
  • Credit won’t make or break your options: Because the lender can take the inventory in the event you default, your credit score isn’t a make-or-break factor. 
  • Capitalize on unsold products: Rather than simply letting unsold inventory sit, inventory financing provides a beneficial way for you to take advantage of your products.

You don’t need to check off all the boxes above, but in general, businesses that meet these criteria are the best fit.

If your business doesn’t, then don’t worry—there are plenty of other business financing options that might work better.

Apply Now to Consider Your Financing Options

Many lenders that offer inventory financing insist that borrowers have years of proven sales 

history and excellent credit. 

At National, however, we pay closer attention to what your business is doing right now, and how a new opportunity could help you reach the next level.

Even with only six months in business and credit challenges, you can still find excellent options that will help your business grow. 

As the leading online lender, we explain your options available within our 75+ lender marketplace. Then, we help choose the one that works best for you, and get your business funded! 

To get started, apply now!

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!

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About the Author, Megan Capobianco

Megan is passionate about helping business owners along their journey - providing them with relevant content they can use in their day-to-day operations.


Disclaimer: 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.