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Inventory financing lets you borrow against stock you already own or plan to buy.
The lender advances a percentage of what it would bring in a liquidation sale, usually somewhere between 20% and 80%. The inventory serves as collateral, securing the loan.
I've spent more than 15 years arranging financing for small to midsize business owners. I know that cash flow squeezes are a common challenge for retailers, wholesalers, distributors, and ecommerce sellers. For these or other product-based businesses, inventory financing can help cover working capital expenses while you wait on sales.
Below, I cover what lenders advance against, how to do the math yourself, and which funding options fit which situations.
| Financing type | What it advances against | Typical advance rate | What it fits |
|---|---|---|---|
| Inventory financing | The appraised liquidation value of the stock | 20% to 80% | Businesses whose inventory is their largest asset |
| Business line of credit | Revenue and bank deposits, not the stock | Credit line up to $5 million | Ongoing restocks and repeat reorders |
| Short-term business loan | Revenue and bank deposits, not the stock | $10,000 up to $5 million | A single large or seasonal buy |
| Invoice factoring | Unpaid invoices from customers who've already received goods | Up to 100% of invoice value | Recovering cash after the sale to fund the next order |
| Merchant cash advance | Future card and bank sales | Advance up to $5 million | Strong daily sales with a thinner credit score |
| SBA loan | Revenue and business financials, with collateral sometimes required | Borrow up to $5 million | Planned seasonal buys where you have 30 to 90 days |
| Home equity line of credit | Equity in qualifying real estate you own, one to four units | Credit line up to $750,000 | Owners willing to put personal property behind a stock purchase |
What Lenders Advance Against
The most important number to remember with an inventory loan is the borrowing base. This is the eligible collateral multiplied by an advance rate.
Lenders set the advance rate against what the goods would bring in a quick sale, not the retail price. Advance rates typically run from 20% to 80% of the inventory's value. Where your stock lands in that range depends on how easily it could be sold.
Here's how the type of inventory affects your advance rate.
Finished goods with an established market
Highest advance rates, because resale is straightforward
Commodity raw materials
Treated similarly to finished goods, since they're interchangeable
Specialized or perishable goods
Lower rates, unless they're adequately insured
Customized component parts
Often only nominal resale value
Work in process
Frequently excluded, because it costs more to finish
Stock spread across multiple locations
Lower rates, since it's harder to monitor and costlier to liquidate
Consignment goods
Normally ineligible, since you don't control them
Aged or obsolete stock
Excluded from the borrowing base
Lenders typically ask for a current inventory list, with counts and turnover, and they may order an appraisal on your stock.
Calculating the Cost of Inventory Financing
It's easy to estimate the cost of an inventory loan in advance if you know how to do the math.
The rate you're quoted is often related to how quickly the goods move. Lenders look at your profit margin, the percentage of the sale you keep, and your holding cost, or the interest rate multiplied by how long the stock sits before you sell it.
Let's look at an example. Here's how the math works out on the same $50,000 of inventory. In one scenario, it takes a while for the goods to move, while in the other, it sells quickly.
| Line item | Fast-moving goods | Slow-moving goods |
|---|---|---|
| Order total | $50,000 | $50,000 |
| Retail value | $80,000 | $57,500 |
| Gross margin | 37.5% | 13% |
| Months to sell | 4 | 10 |
| Share that sells at full price | 100% | 80% |
| Gross profit on what sold | $30,000 | $6,000 |
| Loss on marked-down leftovers | $0 | $5,000 |
| Financing cost at 14% APR | $2,333 | $5,833 |
| Net result | $27,667 | Negative $4,833 |
I see borrowers lose on inventory loans when they have thin margins, slow-moving merchandise, or they're working with goods they haven't sold before.
Your Options for Financing Inventory
Some business owners choose to use other types of financing to fill the gaps when an inventory loan doesn't make sense. Here's what's available through Clarify Capital's lender network.
Short-term business loans
A lump sum from $10,000 to $5 million repaid on a fixed schedule. Repayment terms run from 6 to 36 months with APRs starting at 6%. Typically used for a single, large purchase.
Business lines of credit
A revolving credit line up to $5 million that covers the day-to-day costs of running a business. You only pay interest on what you draw. APRs start at 6%.
Equipment financing
Covers up to 100% of the value of equipment for your business. Repayment terms run from 12 to 72 months, and the equipment serves as the collateral.
Invoice factoring
Advances up to 100% of the value of an unpaid invoice for a fee of 0.5% to 5% per invoice per month. Tied to when the invoiced customer pays, typically 30, 60, or 90 days.
SBA loans
These loans are backed by the U.S. Small Business Administration (SBA) and run up to $5 million. Terms span 10 to 25 years with rates starting at 6.75%. Financing can land as fast as two weeks but typically takes 30 to 90 days.
Home equity lines of credit (HELOC)
A revolving credit line secured by the value of your home. Lines run up to $750,000 with a draw period of five years. Your home secures the line, so it's at risk if you default.
Merchant cash advances
(MCA) An advance against future revenue at a factor rate of 1.08 to 1.45. Advance up to $5 million and repay in daily, weekly, or monthly payments. Fits if you need money quickly, but it's more expensive than other options.
Minimum Qualifications
For Financing Through Clarify Capital
$10,000 in monthly revenue
Your business must earn at least $10K per month in a business bank account.
500+ credit score
You can get approved with any credit score. But the better your credit rating, the better interest rates lenders offer. Your FICO score should be above 500.
Minimum six months in business
Your company should be operational for a minimum of six months. This shows business lenders that your company is sustainable and won't go out of business.
Have a business bank account
Your Clarify advisor will need three or four months of your most recent bank statements to verify income. This is just to see you're actually making $10K+ month in revenue.
Inventory Financing vs. Purchase Order Financing
I often see business owners confuse these two.
Inventory financing pays for goods you currently have, or will shortly, and you repay it as they sell on a normal schedule. Purchase order financing pays the supplier directly to fill an order.
Here's how to decide which one fits your situation.
| Choose inventory financing when | Choose purchase order financing when |
|---|---|
| You're making an investment in goods for the future | You currently hold a signed order |
| The merchandise will be sold in a short amount of time to multiple buyers | The payment for the inventory is needed prior to fulfillment |
| You need the merchandise on your own shelves | Once the shipment arrives, it will go directly to one buyer |
| You restock at the same frequency; goods come and go at a consistent rate | This is a one-time or abnormally large order |
| You pay back on a pre-determined timetable | You pay off the full amount once the customer has paid |
What to Weigh Before You Borrow
There are two things I tell my clients to consider before applying for inventory financing: the stock and how well you manage it.
Here's what to keep in mind:
Cost against margin
Interest builds when you've thin margins or slow-turn merchandise.
Inventory as collateral
Your stock is collateral, and lenders can seize it if you default.
Potential dead stock
You'll still have to cover the cost of the loan, even if the merchandise stops selling.
Over-ordering
Borrowing at the top of your projection leaves no room if merchandise doesn't sell.
Your reporting process
Lenders may review inventory lists, counts, bank statements, and balance sheets. Sloppy records are a red flag.
Repayment tied to sales
Repayment terms that rise and fall with your revenue make a slow month hurt less. But a string of slow months will add to the cost.
Underwriters also want examples of inventory that has sold within the margin you're claiming, and you may be asked to provide sell-through history and turnover reports.
Operating history matters, too. Most lenders ask for at least six months, so a startup may have a harder time getting financing.
Financing for Your Inventory
Do the math before you decide on an inventory loan. If your profit covers the interest with plenty of room left over, inventory financing makes sense. If you run thin margins or have slow-moving inventory, there are other financing options available.
Clarify Capital compares your offer against our network of 75+ vetted, reputable lenders. The application takes just two minutes, and checking your options won't affect your credit score.
Apply today to see what your inventory can support.
Frequently Asked Questions on Inventory Financing
Here are some of the most common questions I hear about inventory loans.
How Does Inventory Financing Work?
Inventory financing lets you borrow against stock you already own or plan to buy. The inventory is collateral, and the lender advances a percentage of what the stock would cost in a forced sale. This usually lands between 20% and 80%.
How Do You Get Financing for Inventory?
It depends on the type of inventory financing you're looking for. Many business owners choose to apply for financing options like lines of credit or short-term loans, which are sized based on your business revenue. With equipment financing or inventory financing, the stock secures the loan. You can apply for inventory financing through alternative lenders, online lenders, banks, and credit unions.
What Is an Inventory Financing Line of Credit?
An inventory financing line of credit is a revolving line of credit where the borrowing limit changes depending on your eligible inventory. When your inventory increases, the limit goes up. As it sells, you can pay down the line and use it again.
Can I Use Inventory I Already Own as Collateral?
Yes, lenders advance against merchandise you own, though aged stock, consigned goods, and work in process are commonly excluded. The advance rate depends on the same factors.
What Does Inventory Financing Cost?
There are a few factors at play here. Lenders look at your credit score, financing type, and time in business when determining your APR. You'll also want to take into account any origination and appraisal fees that can increase the cost.
Is My Business Information Secure When I Apply?
Yes. Clarify follows SOC 2 security principles designed to protect the confidentiality of your business information throughout the application process. More on how we protect applicant data is available on our blog.
Michael Baynes
Co-founder, Clarify
Michael has over 15 years of experience in the business finance industry working directly with entrepreneurs. He co-founded Clarify Capital with the mission to cut through the noise in the finance industry by providing fast funding and clear answers. He holds dual degrees in Accounting and Finance from the Kelley School of Business at Indiana University. More about the Clarify team →
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