Inventory Financing for Small Businesses: Everything You Need to Know

It’s not always easy to keep your cash flow regular if you’re running a small business. Whether you’re having a slow season, a major contract or sale fell through, or you’re experiencing cash interruptions for any other reason, you may be wondering how you can get a bit more cash to cover your costs. If so, inventory financing for small businesses may be a good option for you. This type of business funding is used specifically for purchasing inventory – products your business will sell. Your inventory acts as collateral for the loan. Then, after you purchase inventory with the loan, the proceeds from your sale will cover the costs of the loan. Let’s take a deeper look at this type of business financing now.

What Is Inventory Financing? How Does It Work?

Inventory financing is a type of secured business loan. The lender gives you the loan, which you use to purchase inventory for your business. This inventory functions as collateral – in other words, if you default on the loan, the funder can repossess all of the inventory, and recoup their investment.

The inventory is yours to sell as long as you’re making your inventory financing payments on time, and you do not default (fail to pay the loan). Then, once you sell the inventory you’ve purchased with your loan, you’ll make a profit – which you can use to repay the loan in full.

It’s quite simple to understand! You need money to buy inventory, so you take out a loan to do so – and then buy inventory with the borrowed cash. Then, once you’ve sold everything, you’ll have made a profit – and you will also have paid off the loan!

Can I Get Inventory Financing? The Basic Requirements

There are a few basic requirements you’ll need to meet in order to get inventory financing, as outlined below:

1. Your business must be product-based – Inventory financing only works if your business sells products. In other words, service-based businesses – think plumbers, electricians, and so on – cannot qualify for inventory loans, for obvious reasons.
2. You must have a year of business history – An inventory funder will want to see a record of your financials and inventory records – so you won’t be able to get an inventory loan if you’re running a brand-new startup. You’ll need to have been in business for a little while.
3. You must meet your lender’s requirements – Each funder has different requirements for the value of your loan, the paperwork required, and other such details. These vary, based on the company issuing the inventory loan.
4. You will need detailed financial records and inventory information – Lenders offering inventory loans will want to review all of your sales data, revenue, inventory turnover rate, profit margins, records of loss, damage or shrink to your inventory, and so on – so be prepared with comprehensive records!
5. You will need to be prepared for due diligence – It can take a long time for an inventory lender to review your information. They may even send out a third-party auditor to help with the process. You need to be prepared for this and be ready for a relatively lengthy application process.

Is Inventory Financing Right for Me?

If you need cash fast, inventory financing is probably not right for you. The process is lengthy and requires quite a bit of work from both you and your lending partner – so those who need a quick loan are better off with another product.

However, if your company has a track record of great sales, and you do not have an urgent need for cash, inventory financing is usually less expensive than other types of business loans, since the value of the loan is secured by your inventory – so it may be a good option for you! It all depends on your own personal situation and needs.

Find more information about how to get a business working capital advance here.