Inventory Financing for Small Businesses: Costs, Terms & Where to Find

Inventory financing is a short-term loan or line of credit used by businesses to purchase inventory. Inventory financing is typically secured by your existing inventory with no need to pledge personal collateral. Annual percentage rates (APRs) can range from 12% to 60%. Inventory financing is commonly used to prepare for busy seasons or fill large purchase orders.

Where to Find Inventory Financing

If you have already attempted getting inventory financing through a traditional bank or your suppliers and were unsuccessful, you may be wondering what other options are available. There are many short-term business loans that can provide financing options that can get you the funds that you need quickly and have more lenient qualification requirements than traditional lenders.

5 Top Inventory Financing Companies 2020

BlueVine: Inventory Line of Credit

BlueVine’s small business line of credit (LOC) is a great solution for businesses looking for up to $250,000 of working capital. Newer businesses with only six months of business operations as well as those in a variety of credit score ranges can qualify. The better your personal credit score, the longer the repayment term you can qualify for and the lower the rate (APRs range from 15% to 78%). Plus, you can get funded in as few as one to three business days.

LoanBuilder: Term Loan for Inventory

A short-term loan is a popular alternative to a line of credit for working capital needs, such as inventory financing, because they’re often easier to qualify for and faster to fund. LoanBuilder offers loans up to $500K with no origination fees or prepayment penalties to businesses with 9+ months in business, a credit score of 550+, and $42K+ in annual revenue. Check out LoanBuilder to prequalify online in minutes and get funded in as fast as 1 business day.

Fundbox: Line of Credit for Inventory

Fundbox is a great option for borrowers with less-than-perfect credit because it requires a 500 minimum credit score. An inventory line of credit from Fundbox is also good for quick financing up to $100,000 because of its competitive costs — APRs range from 10% to 79% — and weekly repayment terms of 12 or 24 weeks. 

Payability: Inventory Financing for Marketplace Sellers

Payability offers a small business line of credit for ecommerce businesses, selling on platforms like Walmart or Amazon, of up to $250,000 based on their future marketplace receivables. Borrower eligibility is based on your marketplace account health and performance, and no credit check is required. You can apply online quickly and easily in a matter of minutes. If approved, you can get funded the same day

Behalf: Traditional Inventory Financing

Behalf is an inventory financing provider, who pays your vendors directly enabling you to make large purchases of inventory. You can borrow up to $50,000 with an APR averaging around 30% in minutes, and you have up to six months to repay the loan. The application requires only a Social Security number and a bank account.

How Inventory Financing Works

With traditional inventory financing, your lender will lend you funds based on the value of your inventory. You can use these funds as a source of cash to fund your working capital cycle, which includes buying more inventory, providing payment terms to your customers, and paying for business expenses. You can get traditional inventory financing from banks, asset-based lenders, and your suppliers.

However, other inventory financing options provide the same benefit. It’s often quicker and easier to get short-term working capital financing from alternative lenders. Since these loans are either unsecured or based on the value of your invoices, the approval process is much quicker. Plus, these lenders are often able to get businesses approved who might not meet the qualifications of traditional lenders, such as low credit scores or a short time in business.

Who Inventory Financing Is Right For

Inventory financing is right for any retail business that needs to pay for inventory before they receive payment from their customers. It can help solve inventory shortage problems where you don’t have enough of the inventory your customers want, or it can help you increase inventory levels of new products to drive sales.

The following types of businesses may benefit from inventory financing:

• Brick-and-mortar retailers: Many retailers use inventory financing because most of their cash is tied up in inventory; having the right number of products on their shelves is often the livelihood of their business; inventory financing gets you the inventory levels you need while freeing up your cash flow for other expenses
• eCommerce retailers: Selling products online through an e-commerce website doesn’t necessarily mean your cash flow or inventory management is any easier; you’ll still likely need to keep your inventory levels at an acceptable rate to fulfill a constant flow of customer orders
• Wholesalers: Wholesalers need a steady supply of inventory to fulfill incoming orders and replenish inventory that leaves the shelves; since wholesalers typically have larger order volumes than retailers, it’s important to keep more disposable inventory that could get ordered at any given time; financing can help you replenish that inventory, even if you haven’t yet been paid for past purchases yet

Many retail and wholesale businesses use inventory financing because most of their cash is tied up in inventory. Having the right number of products on their shelves is often the livelihood of their business. Inventory financing gets you the inventory levels you need while freeing up your cash flow for other expenses.

Types of Inventory Financing

There are a number of ways to finance inventory. There are loans that are designed specifically to use your inventory as collateral, such as with traditional inventory financing from a bank. However, there are other financing options that can be used to purchase inventory without the limitations of an inventory loan. Five of the best short-term inventory financing options include business lines of credit, online inventory financing, traditional bank financing, asset-based lending, and vendor financing.

1. Small Business Line of Credit From an Online Lender

A business line of credit through an online lender is the fastest inventory financing solution. With a line of credit, you get financing that you can use repeatedly without having to reapply. Additionally, if you have unexpected expenses that pop up, you can use your business line of credit for more than just inventory purchases. It’s a good tool to have regardless of your needs.

Who a Small Business Line of Credit Is Right For

A small business line of credit is generally right for businesses that have consistent, or recurring, inventory or cash flow needs. Since you don’t have to reapply each time you need money, it’s an ideal solution to be used for the same purchases each month or to supplement a cyclical small business’ working capital needs.

Small Business Line of Credit Costs

The costs of a business line of credit can vary widely, depending on the lender that you choose. The general interest rate can range from 13.99% to 55% APR. This doesn’t include additional fees you may be charged in conjunction with the line of credit, such as draw fees, loan origination fees, or service fees.

Small Business Line of Credit Terms

With a line of credit, you can get funding up to $250,000, and repayment terms will generally be six to 12 months. You only pay interest on the portion of the credit line you’ve used. So, if you’re approved for a $100,000, but only borrower $10,000, you are only charged interest on $10,000.

Small Business Line of Credit Qualifications

To qualify for an unsecured line of credit you will need to have a credit score of at least 550, your business needs to be operational for greater than one year and needs your business needs to be generating at least $50,000 in annual revenues and have no recently reported credit violations.

2. Online Inventory Financing

There are a variety of online lenders that offer financing specifically for inventory. Getting a business line of credit might be easier and faster, but if you know you’ll be using the money solely for inventory, it can be more affordable to choose one of these more specialized providers. These lenders typically pay your suppliers directly and then collect repayment.

Who Online Inventory Financing Is Right For

Online inventory financing is good for businesses that don’t have a lot of inventory needs, or that have difficulty qualifying for other forms of financing. Online inventory financing works well for businesses that need a smaller amount ― up to $50,000 ― as a short-term solution and know that they don’t need to use the financing for other purposes.

Online Inventory Financing Costs

Online inventory financing lenders will typically charge you up to 3% of your loan for every 30 days that you are in repayment. The average APR falls between 21% to 61%, which is standard for most short-term small business financing options. Therefore, this type of inventory financing can be more affordable if you pay the borrowed amount back within the first month.

Online Inventory Financing Terms

Inventory financing loan amounts range from $300 to $50,000, and your repayment terms will be between one and six months. These loans work similarly to a short-term business loan, but the use of the funds is limited to the purchase of inventory. You can get fully funded in as quick as one day.

Online Inventory Financing Qualifications

Online inventory financing lenders are not always clear about their qualification requirements. Each of them will generally check your personal credit and request to connect to your bank account to determine your eligibility. If approved, some will want to verify information about your inventory to see how long of a shelf life it typically has.

3. Traditional Bank Financing

When looking for inventory financing, you can also go the route of more traditional financing and get a bank loan or line of credit. This is the slowest option but the most economical one if you’re borrowing money. Banks prefer to lend to businesses with strong cash flow and good credit. The value of inventory is a secondary consideration.

Your existing inventory will serve as collateral for bank financing, but the bank may also place a blanket lien on your business assets, which allows them to go after any business asset if you can’t pay back the loan. A blanket lien can also affect your ability to get other financing. If your business isn’t profitable, the bank is less likely to approve you or will approve you for smaller amounts of capital.

Who Bank Financing Is Right For

Businesses that don’t need immediate financing and are looking for the most affordable option. Also good for business owners with a strong personal credit score and businesses with a strong business credit score and business credit report.

Bank Financing Costs

Whenever you get a loan from a bank, you’ll likely encounter origination fees, packaging fees, or other upfront costs that are rolled into your loan or paid out of pocket. The APR typically falls between 4% and 10% for traditional banks and closing costs can be 2% and 5%.

Bank Financing Terms

You can borrow a large amount of money to fund your inventory from a bank, as much as $1 million or more. You’re also likely to get the longest repayment terms with a bank, typically falling between one to five years. A bank may offer you a business line of credit to finance your inventory if you need money on a consistent basis.

Bank Financing Qualifications

Like other forms of financing, it can be difficult to qualify with a bank. While it will vary by lender, and depend on your current banking relationship with them, you can generally qualify if you meet these minimum standards:

• Credit score: 680 and higher (check your credit score)
• Time in business: Two or more years
• Inventory value: One year or more of shelf life and can only borrow up to 50% of inventory value
• Debt service coverage ratio (DSCR): 1.25 and higher
• Debt-to-income (DTI) ratio: Less than 36%
• Other qualifications: Business must be profitable; you can’t have any negative credit events such as bankruptcy, tax liens, or repossessions

Generally with a bank, the stronger your business’ cash flow is, the more likely it is that you will get approved because you’re showing lenders that you can pay back the loan.

4. Asset-based Lenders

Whereas banks lend based on cash flow and credit score, asset-based lenders look at two sets of assets, accounts receivable and inventory, in deciding whether or not to approve you for a loan.

“We serve businesses that can’t qualify for bank financing because their profits or credit score aren’t high enough,” says Marc Smith, senior vice president at Magnolia Financial, an asset-based lender that provides inventory financing for business-to-business companies.

Asset-based lenders take a much more hands-on role in assessing your inventory by appraising your inventory on-site prior to you getting approved. After that, they require monthly reports on inventory levels. Ideally, according to Marc Smith, they want clients with well-managed inventory systems who know exactly where their inventory levels stand at any given moment in time.

Who Asset-based Lending Is Right For

Businesses who need a large amount of financing of $500,000 or more and carry at least double their financing needs in inventory value. Meaning, if you need $500,000 in financing then at any given time you have $1 million or more in inventory.

Asset-based Lending Costs & Terms

Asset-based loans have interest rates of approximately 10% to 18%. There may also be loan origination fees and costs related to the lender doing an on-site inventory analysis. You can borrow up to 50% of the value of your inventory and get funded within one month. The loan is secured by your inventory and your business receivables.

Asset-based Lending Qualifications

There are no set credit score or revenue requirements. Instead, the lender will inspect and appraise the inventory and assess your inventory management system. You can get approved for up to 50% of the value of your current inventory.

5. Vendor Financing

A good place to start when looking for inventory financing is to ask your vendor if they will allow you to pay on credit. This is often the easiest way to purchase inventory when you’re short on cash because your vendors will be very interested in making a sale or getting an update on the payment you owe them.

Vendors may offer 30- to 90-day payment terms. If this is the case, they may collect a percentage of payment up front (deposit) and defer the rest to an agreed-upon date. They might collect installment payments over time. Still, if you have a good relationship, you should be able to negotiate payments in full after 30 to 90 days.

Although most vendors that offer these financing services offer them for free, some may charge an interest rate. Before offering you a payment plan, the vendor will most likely check your business credit score and business financials. However, a vendor is more likely than a lender to overlook issues like a bad credit report or poor cash flow.

Who Vendor Financing Is Right For

Vendor financing is for everyone. If you can get your vendor to agree to extend your payables, then it’s a great solution, regardless of what your needs are or how big of a business you have. It’s typically best for existing businesses and business owners with prior vendor relationships.

Vendor Financing Costs & Terms

Your vendor can extend your payables by offering you additional time to pay what you owe them, or they may charge you interest to pay off your inventory during a longer period of time. These costs could be anywhere from 1% to 10% or more, depending on how comfortable your vendor is with offering financing. There might also be late payments if you fail to pay on the agreed date.

Vendor Financing Qualifications

In most cases, a vendor will require that you have an established history with them. This will likely entail a review of your purchase and payment history with the vendor. Additionally, your vendor will typically also want to review your credit scores. Specific requirements will vary by vendor, so you will need to talk to your vendor directly to find out their requirements.

How to Get Vendor Financing

Some vendors may openly advertise that they provide vendor financing options while others may not. If you are interested in utilizing vendor financing for your inventory needs, you should inquire with your vendors to find out what, if any, options they offer. The vendor will be able to tell you what requirements you need to meet, and what the fees and repayment structure will look like.

Pros & Cons of Inventory Financing

As there are with nearly all decisions in life, there are pros and cons to using inventory financing for your business. Some of the positives of inventory financing are that it allows you to increase your sales volume, and helps you prepare for your busy season. However, the negatives of inventory financing can include that many inventory loans can only be used to purchase inventory and most inventory financing options are short-term.

Pros of Inventory Financing

Inventory financing has many benefits for small businesses with inventory needs. Inventory financing can assist you in maintaining cash flows while keeping inventory available for your customers. Retailers are notorious for having thin profit margins, which can be problematic when you want to add additional inventory. Inventory financing can help with that cash flow problem.

Some of the benefits of inventory financing are:

• You can prepare for the busy season: If your business is seasonal or cyclical, you can prepare for the upcoming busy season by using inventory financing to acquire inventory during the months leading up to the start of your best season; by using inventory loans, you can be prepared to meet your customer demands, and repay as the inventory clears your shelves
• You can improve your cash flow: Many retailers struggle with cash flow problems due to thin profit margins and the timing of their sales in contrast to their expenses; to alleviate some of these cash flow woes, an inventory loan can help purchase new inventory to sell and thereby free up working capital to help you meet your other business expenses
• You can increase sales volume: Inventory financing can help your business improve its total revenues by allowing you to maximize the amount of inventory that you have for sale; when you don’t have to cash on hand to purchase your inventory, you’re much more likely to purchase extra items that sell well or new inventory items to offer your customers
• It’s easier to get than other financing: The actual inventory you purchase with an inventory loan is often used for collateral when you’re financing it; this means that inventory financing is much easier to obtain than an unsecured business loan would be; additionally, because the inventory loan is secured by collateral, you won’t be required to sign a personal guarantee with the lender

Cons of Inventory Financing

While there are many benefits to businesses when utilizing inventory financing and inventory loans, there are also some aspects that may be concerning to business owners. Many inventory specific loans can only be used to finance inventory, which may not fully meet your small business’ working capital needs entirely and valuing inventory can be difficult.

Some of the negatives associated with inventory financing are:

• True inventory loans can only be used for inventory: If you opt to go with an inventory specific loan, the loan funds can only be used for the purchase of inventory; if you find yourself not needing the amount of inventory that you thought you would, you cannot use the remaining loan funds to supplement other working capital needs
• Inventory financing options are short-term: While you may only need a single influx of funding to purchase inventory, it may take some time to turn that inventory into cash; inventory loans often have short repayment terms, and if you aren’t able to convert your inventory into sales quickly, you may find yourself struggling to meet your debt obligations
• It can be difficult to assign value to inventory: One major drawback is the expense of due diligence; many traditional lenders will require a field audit to look at your inventory, and see how you care for your inventory; they may also want to look at your accounting and inventory systems to make sure they’re functioning properly and get an inventory appraisal
• Due diligence items can be costly: Due diligence items pertaining to inventory financing can be costly, and you’ll be asked to pay these costs up front before you know if you’ve been approved for financing; if you go with a loan provider that requires these qualification measures, we recommend only applying for larger amounts of inventory financing, in the hundreds of thousands of dollars
• Inventory carries risk: Using inventory for collateral on an inventory loan can be risky. Items that are flying off the shelves today may not be tomorrow. Inventory can be stolen, or damaged and lose value; due to these risks inventory lenders may undervalue the inventory that you want to use for collateral

Inventory Financing Frequently Asked Questions (FAQs)

What Is Inventory Finance?

Inventory financing is a short-term loan or line of credit used by businesses to purchase inventory. The loan or line of credit is typically secured by existing inventory without needing to pledge personal collateral. Inventory financing is commonly used to prepare for busy seasons, fill large purchase orders, or as startup capital for product-based businesses.

What Is an Inventory Loan?

An inventory loan is a loan that is secured by a business’ inventory. The collateralized inventory can either be existing inventory, or inventory that is being acquired with the inventory loan. Retail businesses often use inventory loans to increase their inventory levels prior to the start of their busy season in anticipation of increased demand.

Bottom Line

Inventory financing can help your business meet customer demand by funding the purchase of additional inventory that will fill your shelves and hopefully increase your sales. There are numerous options for inventory financing available; the right financing option for your small business depends on how much funding you need, and how quickly you need it.

Our recommended inventory financing option is a business line of credit. If you’ve been in business for at least six months, have a credit score above 600, and more than $100,000 in annual business revenue, you may prequalify for up to $250,000 in financing with BlueVine. The application can be completed online with pre-approval issued within minutes, and you can receive funding in as quickly as one day.