Inventory financing, also known as warehouse financing, is a loan or line of credit used to purchase new inventory or get cash from existing inventory, which then serves as collateral for the loan. This type of financing can benefit companies that need to stockpile inventory before selling or shipping it to customers or that want to unlock capital tied up in existing inventory. It is a usefultool for managing working capital effectively, as it allows businesses to maintain necessary stock levels without depleting cash reserves. For businesses seeking broader financial flexibility, working capital loans can provide additional funding to support daily operations and growth initiatives.

Key Considerations

Inventory financing is a short-term borrowing solution that uses existing or new inventory as collateral for a loan or line of credit.
The benefits of an inventory loan include easier access to funds and faster growth, while the cons involve high interest and fees, approval challenges, and potential partial funding.
Established businesses like wholesalers, retailers, and seasonal operations typically use inventory financing, while start-ups may need alternative funding options.

Inventory Loans vs. Lines of Credit

There are two main types of inventory financing: loans and lines of credit.

Inventory loan: An inventory loan is a lump sum amount a borrower can access to secure inventory. The amount issued is based on the total value of the inventory, and the borrower will need to make fixed payments over the life of the loan, which include interest and fees. Inventory loans can be part of a broader working capital loan strategy to ensure your business has the necessary funds to cover other operational costs as well.
Inventory line of credit: This revolving debt allows you to borrow up to a certain limit. Like a credit card, you can continue to draw from the line of credit if you meet minimum payments and other lender requirements. A working capital loan can complement an inventory line of credit by providing additional liquidity for managing day-to-day expenses.

Pros and Cons of Inventory Financing

Inventory financing offers several advantages for growing businesses looking to secure sufficient inventory to meet customer demands.

Pros of inventory loans

Easier access to funds: While many lenders require a certain personal or business credit score to qualify for a loan, inventory financing may be easier to access since the inventory will back the loan as collateral.
Faster business growth: Inventory financing is intended to help companies increase inventory to meet growing customer demand. By receiving funds upfront, companies are able to scale more quickly when compared to companies that wait for income generation to support the purchase of additional inventory.

Cons of inventory loans

Interest and fees: New and growing businesses may struggle to pay back the cost of an inventory loan if the interest rate and fees are too high.
Approval challenges: Financial institutions will assess the riskiness of your business and products/services when you apply for an inventory loan during a period known as due diligence. This process can take significant time and resources. If the lender believes that you may have difficulty selling the products, they may decide not to approve your loan.
Partial funding: If your business requires a significant amount of inventory, lenders may be willing to finance only a portion. You'll need to shop around and research various lenders to find one that will provide sufficient capital to meet your needs.

What Types of Businesses Use Inventory Financing?

Inventory financing is typically used by established companies like wholesalers, retailers, and seasonal businesses that can prove that their products are selling in the market. Lenders generally won’t lend to a brand-new business that wants the loan to purchase the first round of inventory. Companies in the startup phase may have better luck applying for startup loans instead.

How to Access Inventory Financing

Applying for inventory financing involves several steps, similar to other types of loans.

Understand eligibility requirements: Though lender requirements vary, you may need to prove that you’ve been in business for at least a year and furnish the sales records to prove it. The lender is likely to be especially interested in inventory metrics, including inventory turnover, profits, and projections for the upcoming quarters. If you don’t have a system that clearly tracks inventory, you may need to put a process in place that allows you to easily follow merchandise through your product lifecycle and share reports with potential lenders accordingly.
Apply for a loan: Once you confirm your business is eligible for a loan, you’ll need to submit an application either online, over the phone, or in person. When you apply, you may need to submit financial statements, including balance sheets and profit and loss (P&L) statements for the prior few years. In addition, you’ll likely need to share a full inventory list and your plans for future inventory that you plan to acquire with the loan.
Assist the lender during the due diligence period: Due diligence is the period when a lender vets your business to confirm whether you should receive funding. At this time, lenders may request additional documentation as they comb through your company records and inventory or even ask to visit your offices or the site where you hold your inventory.
Review the lender’s preliminary offer: During the due diligence process, you may receive a preliminary offer outlining loan specifics, including the amount, interest rate, repayment terms, fees, and prepayment penalties. While this isn’t an official contract, signing it can demonstrate your seriousness about taking on the loan.
Wait for approval and sign the loan contract: If approved, you’ll receive an official loan contract with final details about the amount borrowed, repayment terms, and interest rate. Once you sign, the lender will issue funds in accordance with the contract. Then, you’ll be able to use funds to purchase inventory and begin paying back the loan according to the terms of the contract.

Alternatives to Inventory Financing

There are several alternatives to consider if you do not qualify for inventory financing or want to explore other options.

Small business loans: A small business loan can be used for any business reason, from purchasing inventory to maintaining day-to-day operations. With loan amounts up to $500K^,1,2 BHG Financial can help your business meet large and small inventory needs.
Small business credit card: If your business needs a small amount of inventory to meet demand, you may be able to put the purchase on a business credit card and then pay back what you owe when customers purchase the product.
Invoice financing: Invoice financing is another borrowing option that uses unpaid customer invoices as collateral to secure a loan. A lender will issue a payment to you for a percentage of each unpaid invoice you issue, which may prove helpful if you send large invoices monthly and struggle to recoup the balance due quickly. Combining invoice financing with working capital loans can help ensure a steady cash flow for ongoing operational needs.

BHG Financial Can Help Your Business Meet Inventory Needs

BHG Financial understands the critical role of working capital in maintaining business operations and fostering growth. If you’re ready to explore financing to meet your inventory needs, BHG Financial can provide you with a working capital loan up to $500,000^1,2and terms of up to 12 years.¹ This unique combination of loan features, along with our fixed interest rates, results in affordable monthly payments. Compared to merchant cash advances, business credit cards, and other high-interest-rate financing, our loans can help you save big.

Get started by using our payment estimator to view your personalized loan estimate without affecting your credit score.

FAQs: Inventory Loans

What collateral is required for inventory funding?

Inventory financing primarily requires your inventory as collateral. Lenders will evaluate the inventory's value and quality to determine the loan amount. In some cases, additional collateral or personal guarantees might be needed, depending on the lender's requirements and your business's financial condition.

What are the risks of inventory financing?

Inventory financing comes with risks such as high costs, with potentially higher interest rates and fees. Approval can be challenging if lenders view your inventory or business as risky. Additionally, if your inventory doesn’t sell or becomes obsolete, repaying the loan can strain your cash flow.

How does inventory financing impact a business's financial statements?

On the balance sheet, the inventory loan increases your liabilities as it represents a financial obligation. The inventory used as collateral will appear as an asset, potentially boosting your current assets. On the income statement, interest and fees from the financing will be recorded as expenses, impacting your net profit. Additionally, the increased inventory can lead to higher sales, which may improve revenue, but this depends on how well you manage and sell the stock. Understanding these impacts can help with your financial planning and reporting.

Starting a financial advisory firm FAQs

Purchased equipment depreciates in quality and value over time, which can impact its functionality, resale value, and your overall return on investment.

Many leasing agreements allow for equipment upgrades, ensuring you always have access to the latest technology.

Buying equipment may be the more cost-effective option compared to leasing if the equipment is high-quality and requires minimal maintenance.

Leasing typically appears as an operational expense, which can help keep liabilities lower compared to using working capital loans used for purchasing equipment.

Both leasing and buying have potential tax benefits, such as deducting lease payments as business expenses or claiming depreciation on purchased assets.

¹Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Finance amount may vary depending on the applicant's state of residence.

² BHG Financial business loans typically range from $20,000 to $250,000; however, well-qualified borrowers may be eligible for business loans up to $500,000.

Business Loan Repayment Example: A $94,695 commercial loan with a 9-year term and an APR of 14.8% would require monthly payments of $1,591.

No application fees, commitment, or impact on personal credit to estimate your payment.

For California Residents: BHG Financial loans made or arranged pursuant to a California Financing Law license - Number 603G493.

IMPORTANT INFORMATION ABOUT ESTABLISHING A NEW CUSTOMER RELATIONSHIP To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify and record information that identifies every customer. What this means for you: When you apply for a loan, we will ask for your name, address, date of birth, social security number and other information that will allow us to identify you. We may also ask to see your driver's license or other identifying documents. If all required documentation is not provided, we may be unable to establish a customer relationship with you.

What is Inventory Financing and How Does it Work?