The Ultimate Guide to Inventory Financing

Inventory financing is a type of business loan that gives you capital to purchase inventory, in other words, products that your business will sell. Inventory financing can be structured as a traditional business term loan or line of credit, depending on the lender, and the purchased products serve as collateral for the financing.

This being said, in addition to helping you keep your shelves stocked, inventory financing also allows you to pursue opportunities from suppliers. Plus, since the inventory itself serves as collateral, there’s no need to put up additional collateral on the loan.

In this guide, we’ll break down everything you need to know about inventory financing—including how it works, the best options for small businesses, and how to qualify.

With our overview of the top inventory financing loan options in mind, you might be interested to learn more about how inventory financing works.

In short, when you apply for inventory financing, the lender will extend you capital in the form of a term loan or line of credit to buy inventory. As we mentioned above, the inventory that you purchase will serve as collateral on the loan—making inventory financing a type of asset-based financing.

This being said, the way inventory financing works can be a little different depending on whether the product is structured like a business line of credit or a business term loan. With a term loan, you’ll receive a lump sum of capital to purchase your inventory and pay back that amount, with interest, over time.

With a line of credit, on the other hand, you’ll receive a credit line from which you can draw to purchase your inventory. Unlike a term loan, which requires that you pay back the entire amount that you’ve borrowed with interest, you only pay interest on the amount your draw from your credit line. Therefore, if you have a $100,000 credit line, but only need $20,000 to purchase your inventory, you can draw that $20,000 and only pay interest on that amount.

With this distinction in mind, overall, as long as you make your scheduled payments on time and in full, the inventory that serves as collateral for the loan is yours to keep or sell as you see fit. On the other hand, however, if you default on the loan, your lender has the right to repossess your inventory as repayment for the loan.

Additionally, it’s also worth mentioning that you won’t always get a loan that’s equal to the full value of the inventory you want to purchase. Similar to the way real estate or equipment loans work, an inventory financing company might only finance about 50% to 80% of the inventory’s appraised liquidation value. Often, the liquidation value will be lower than the market value of the inventory—and this way, lenders ensure that they will be properly compensated if your business is unable to pay back the loan.

Overall, inventory financing is commonly used by retailers, wholesalers, and seasonal businesses, as well as car dealerships and other types of businesses with significant capital tied up in inventory. Inventory financing can be used to cover short-term cash flow gaps, to prepare for a busy season, to capitalize on supplier discounts, or to launch a new product.

To get a better sense of how inventory financing works, let’s take a look at an example:

Suppose that you run a car dealership and want to buy $1 million worth of new cars. You approach a lender for an inventory financing loan, and they hire an independent appraiser to value the inventory (note that online lenders generally won’t hire appraisers). The appraiser finds that the liquidation value of the cars is $750,000. If the lender’s policy is to loan 70% of the inventory’s appraised liquidation value, you’ll receive a loan or business line of credit for $525,500.

As we explained above, if the financing is structured like a term loan, you’ll get the full amount of money all at once. You can use the money to buy the cars and will pay back the loan, with interest, in accordance with the lender’s repayment schedule. On the other hand, if the financing is structured as a line of credit, you can draw from your credit line to pay for your car purchases as needed—and then, you’ll repay the draws with interest over a specific time frame.

If you think inventory financing is a viable funding option for your business, you might be wondering where to actually get this type of loan. Overall, banks, online lenders, and inventory financing companies offer this type of funding.

This being said, however, as is the case with other types of business loans, it will be much more difficult to qualify for inventory financing from a bank than from an alternative lender. When it comes down to it, banks will offer the most affordable forms of inventory funding—but they’ll also have the strictest requirements and be the slowest to fund.

With this in mind, regardless of the type of lender you work with, you should expect to meet the following requirements in order to qualify for an inventory financing loan:

Of course, the specific requirements you’ll need to meet to qualify and receive inventory financing will depend on the lender you decide to work with. As we mentioned, banks will offer the most affordable loans, but will also require the highest qualifications and will be slowest to fund.

Online or alternative lenders, on the other hand, will be much more flexible and faster for those who can’t qualify (or wait) for an inventory financing loan from a bank. As we summarized in the chart above, here are five of the best options for inventory financing for small businesses.

For a line of credit option for inventory financing, you might consider Headway Capital.

Headway Capital is a particularly worthwhile option for businesses with less than ideal credit—as their minimum credit score requirement is only 560.

Additionally, Headway only requires a minimum annual revenue of $50,000 and six months in business—making their line of credit a worthwhile option for startup funding as well.

This being said, Headway offers lines of credit in amounts up to $100,000 with terms of 12, 18, or 24 months.

Headway allows you to apply for their line of credit quickly and easily online and can approve businesses in as little as one business day. When it comes to inventory financing products, however, Headway Capital will also be one of the more pricey options—with an APR that ranges from 40% to 80%.

For a more affordable inventory financing line of credit, you might look into OnDeck. With OnDeck, you’ll find a lower APR range than Headway Capital, but also the highest requirements of the three lenders.

OnDeck offers lines of credit in amounts up to $100,000, a term of 12 months, and an APR range of 35.9% to 84.9%(based on loans originated in the half-year ending March 31, 2024; minimums provided are rates that at least 5% of customers received).

Like Headway, you can apply for an inventory line of credit from OnDeck quickly and easily online and receive approval as fast as one business day.

To qualify for an OnDeck line of credit, you’ll need at least $100,000 in annual revenue, a 625 personal credit score, and at least one year in business.

If you’d prefer an inventory financing term loan instead of a line of credit, you might look into Credibility Capital.

Credibility offers business term loans of up to $350,000 with terms of 12 to 36 months and interest rates from 8% to 20%.

Of all of the inventory funding options we’ve discussed thus far, Credibility has the highest requirements—however, they’re also generally pretty affordable for an alternative lender.

With Credibility, you’ll need at least two years in business, strong personal credit, and be currently generating revenue to qualify.

Like Headway and OnDeck, Credibility offers an online-based application that can be completed fairly quickly. Additionally, Credibility’s term loans are fully amortizing—meaning you can save on interest by paying off the loan early.

Finally, another top inventory financing loan option again comes from OnDeck.

In addition to their line of credit, OnDeck also offers term loans that can be used for inventory purchases. With this financing product, the qualifications are the same as their line of credit—at least one year in business, a minimum credit score of 625, and $100,000 in annual revenue.

This being said, OnDeck provides term loans in amounts up to $250,000 with terms up to 24 months and interest rates from 27.2% to 99.9% (based on loans originated in the half-year ending March 31, 2024; minimums provided are rates that at least 5% of customers received).

In this way, an inventory financing loan from OnDeck is great for highly qualified businesses who can receive a low interest business loan—especially if they need a loan of a larger amount.

OnDeck’s loan application process, like their line of credit process, is online-based with approval as fast as one business day. Moreover, not only does OnDeck not charge a prepayment penalty, but they also offer an incentive for paying off your loan early—a 25% discount on your outstanding interest.

Ultimately, it’s up to you to determine whether or not inventory financing is best for your business—and if you decide it is—where you should apply to actually get this type of financing.

This being said, if you’re still unsure of whether or not inventory financing is right for your business, you can review the following pros and cons to help you make your decision.

• Boost sales volume: Inventory financing is most effective for small- to medium-sized businesses who use it strategically—typically, to restore depleted stock after demand outpaced supply. Generally, these businesses know that they could sell more inventory if they had the volume available, but they don’t have the cash on hand to purchase or manufacture the inventory for sale. In these cases, inventory financing is a fantastic opportunity to boost the amount of inventory your business can purchase or manufacture, and then quickly repay your loan through the proceeds of your higher sales volume.
• No personal assets as collateral: Because the inventory itself acts as collateral on the loan, inventory financing can save you from the risk of offering your own home or property as collateral on the loan, or signing a personal guarantee.
• Preparation for busy months: For seasonal businesses, acquiring the necessary inventory to prepare for the busy season after a long period of low sales can be cost-prohibitive. Having gone several months without much revenue, these businesses might not have the cash on hand to make a big inventory purchase. Inventory financing can fill the gap for seasonal businesses by letting them acquire extra inventory to sell during their busiest seasons.

• Can be difficult to qualify for: Although inventory financing is often more accessible than a traditional bank loan, it’s not always the easiest form of debt financing to secure. The goal of inventory financing is for the inventory itself to be used as collateral—the reality, however, is that if you’re not able to sell your inventory, a lender won’t be able to sell it either—meaning some lenders are more hesitant to approve loans or lines of credit that use inventory as collateral.
• Potentially higher interest rates: You’ll want to keep in mind that the perks of avoiding other collateral or a personal guarantee can come at a cost. Because inventory financing is typically considered less secure than a more traditional loan product, lenders often make up for that added risk in the form of higher interest rates.
• Possible lengthy and expensive due diligence process: Perhaps the biggest challenge to inventory financing as a business funding solution is the potential length and expense of the approval process. If your lender requires due diligence, the process of meeting with an auditor and compiling records can be time consuming and expensive.

At the end of the day, if you decide that the upsides of inventory based loans outweigh the downsides for your business, then your next move is to actually apply for inventory financing.

Overall, the process for applying for inventory financing, as we discussed briefly with our options above, will largely depend on the lender you choose. This being said, with certain banks or lenders, you might see a more extensive application process with a due diligence agreement and business field audit. Generally, however, you should find that applying for an inventory financing loan is similar to applying for any business loan.

On the other hand, if you’ve decided that inventory financing isn’t right for your business, you’ll want to start exploring alternative options. In this case, you might simply opt for a term loan or line of credit that isn’t backed by your inventory.

Ultimately, however, whichever route you choose, you’ll want to compare multiple offers from different lenders to ensure that you’re getting the most desirable, affordable solution for your small business.