Small Business Inventory Financing for Good & Bad Credit

Explore Small Business Inventory Loans To Fund E-Commerce, Retail & More

What is business inventory financing?

Business inventory financing provides retailers and wholesalers with necessary capital to purchase inventory. There are several forms of inventory financing with the two most common being a short-term loan or a revolving line of credit. The inventory purchased with the loan is usually used as collateral to back the loan. Businesses rely on business inventory financing to keep cash flow steady, revamp product lines, increase inventory supplies, and respond to high demand or seasonal fluctuations. 

How does business inventory financing work?

There are two main ways that inventory financing works – a term loan or a line of credit. An inventory term loan is like a regular small business loan that is set for a specific amount to be paid back in monthly payments over a fixed repayment term or in a lump sum following the sale of inventory. Whereas an inventory line of credit provides businesses with a revolving line of credit with a limit. Businesses can draw from funds as needed to purchase inventory and keep cash flow healthy. 

How much does small business inventory financing cost?

Business inventory financing interest rates can vary drastically, thus impacting the overall cost. Typically, you can expect between 3% - 6% from a bank, 8% - 99% from an online lender, and between 8% - 20% from an inventory financing company.  Common fees that may be incorporated into your inventory loan or line of credit include application and/or origination fees, appraisal/inspection fees, prepayment fees, and late fees. Interest rates, fees, and terms can impact the overall cost of the loan. As you compare offers, pay attention to total loan costs to ensure the loan will not impact the profitability of your company. To secure the best terms possible, review your credit history before applying for a loan. Businesses can do so at mySMBscore. 

What are the types of business inventory financing?

If a business is pursuing inventory financing from a lender, they typically have two options – a term loan or a line of credit. With the growing amount of startups and small businesses, though, there are alternative inventory financing options such as crowdfunding or angel investors. Here’s more detail on the main two types of inventory financing:

• Term loan: In a term loan agreement, the lump sum of money is given to the business upfront and then typically paid back in fixed monthly payments over a predetermined period. If the inventory secures the term loan, repayment periods may be set around sales. 
• Line of credit: A line of credit is similar to a credit card but with a much higher spending limit. Typically, a line of credit is secured by an asset to allow the lender to offer a low rate. Essentially, a business line of credit is a revolving line of credit that can be drawn from as needed to purchase inventory. Unlike a term loan, for a line of credit, you only pay interest on the portion of the line of credit you use. Last, assuming your line of credit is “revolving,” once you pay off what you owe, your credit limit returns to the initial approved amount. 

What are the types of businesses that can benefit from inventory financing?

Just about any type of business that sells products can benefit from inventory. Some businesses, though, have higher product costs than others. Three types of businesses that can really benefit from inventory financing include

• Retailers. Retail stores include those that sell items directly to customers for a profit, like shoes, clothing, jewelry, beauty products, housewares, toys, sports equipment, lingerie, and more.

• Wholesalers. A wholesaler is a person or company that sells products in bulk to various outlets or retailers for onward sale, either directly or through a middleman.

• Seasonal Businesses. Instead of enjoying demand for their products year-round, seasonal businesses might see an influx of demand for their products during specific seasons like the winter holidays, return to school, summer vacation, or even major sporting events like the Super Bowl.

What are the pros and cons of inventory financing for small businesses?

Pros:

• Inventory can be used as collateral. 
• The process is fast compared to getting a conventional business loan.
• Improved cash flow.
• Increase sales with more inventory. 

Cons:

• An unexpected economic slowdown or natural disaster could negatively impact demand and make it difficult to repay the loan.
• Unlike a traditional loan, in business inventory financing, the lender tends to be more hands-on. It will sometimes be required to report inventory levels and their valuation every month.
• The interest rates tend to be higher, hovering around 8-10%.

Why would a business need to get inventory financing?

There are a myriad of reasons that businesses might need inventory financing; some of these reasons include:

1. Staying on top of supply chain issues. Supply chain issues can leave customers feeling frustrated and result in lost revenue. To avoid this, inventory financing can provide additional working capital; this can be particularly helpful during busy months like those leading into the holidays.
2. Your credit isn’t great.  Suppose traditional financial institutions have previously turned down your business. In that case, you might be able to secure inventory financing because the risk is less to the lender in this type of agreement (because purchased inventory becomes the collateral).
3. You can avoid offering a personal guarantee. Many business loans require founders to pledge personal assets as collateral to the funding. With inventory financing, however, the inventory becomes the collateral, which can be better than putting your home or car on the line. This way, if your business fails (18.4% small businesses fail within the first year), you won’t have any personal assets on the line.
4. They’re quick and easy. As opposed to getting funding from traditional financial institutions, inventory financing is typically a much quicker and easier process. There’s less paperwork and the funds can get approved within a few days, although funding times can vary.

Am I eligible for a small business inventory financing loan?

Although lenders’ requirements will vary, in general your business should meet the following to qualify:

• In business for at least one year
• Sales history
• A detailed inventory system
• No major credit violation

The best way to determine your eligibility without sharing information with lenders is to check your SMBscore. MySMBscore is similar to personal credit monitoring apps but designed for small and medium-sized businesses. Business owners can empower themself with insight on how to improve their credit scores, based on how a lender will view them. As a result, you can prepare for inventory financing by financially preparing to lock in a lower rate. 

What are the steps involved in getting a business inventory financing loan?

1. Check your credit data. At mySMBscore users can see the areas that lenders usually assess when approving a loan. This way you can view your credit through the lens of a lender, such as Kickfurther, to identify necessary improvements. 
2. Gather your documents together, like the following:

A. Business and personal tax returns. Be prepared to offer your returns for at least the previous two tax years.

b. Business and personal bank statements. Lenders may want to take a closer look at what assets you have in the bank and how money moves in and out of your accounts. 

c. Current inventory list. Your lender may want to see a current listing of your inventory, including where it’s stored, and its estimated liquidation value.

d. Inventory management system details. In order to show your lender how you manage and track your inventory, you may need to share records demonstrating:

How often your inventory turns over.

How much of your inventory you were unable to sell.

How much profit you’ve made on inventory sold.

e. Balance sheet. To get a sense of how financially sound your business is, the lender may want to see a balance sheet from the current year and probably the previous year or two as well. The balance sheet should show your assets, liabilities, and capital.

f.  Profit & Loss (P&L) Statement. P&L statements are telling as they should summarize revenues, costs, and expenses incurred during a specified period (usually a fiscal year or quarter). P&L statements can demonstrate a company’s ability or inability to generate profit by increasing revenue, reducing costs, or combining the two.

g. Sales forecast. The lender may also require a sales forecast to predict what sales may look like in the future.

3. Submit your application to the lender to begin the review process. This step can include initiating a due diligence period to review your financials and completing an inventory appraisal.

4. After the due diligence period, if the lender is satisfied, the final step is signing the loan paperwork to receive loan funds. Although the timing of the process varies from lender to lender, once approved, it’s possible to get funds deposited in the bank account in just a few days. 

Can I apply for an inventory loan with no credit history?

Since lenders consider the inventory as collateral, they often do not care much about your credit history. But, that’s not to say it does not matter. Business owners should have some credit history, personal or business-related, to qualify for any type of financing. To better understand your credit history and identify ways to look better in the eyes of a lender, visit mySMBscore. 

What are the alternatives to inventory financing for small businesses?

Some alternatives to traditional inventory financing include

• Consignment:  One solution you could consider enables companies to access funds that they are unable to acquire through traditional sources.  They connect brands to a community of eager inventory buyers who help fund the inventory on consignment and give brands the flexibility to pay that back as they receive cash from their sales. This alleviates the cash-flow pinch that lenders can cause without customized repayment schedules, allowing your brand to scale quickly without impeding your ability to maintain inventory or financial flexibility.  These options can cost less than 1% a month, but typically range in the 1-1.25% a month range.

• Term loan. Suppose going through the strict due diligence process associated with inventory financing makes your skin crawl, or you’re looking for a more competitive interest rate. In that case, term loans may be a good alternative for you. While the process may be a little easier than inventory financing, it still requires effort and a good credit score. For term loans, you will receive a lump sum of cash, which you will then repay over time with interest. These term loans can be secured (with collateral) or unsecured (without collateral). 

• Purchase order financing. Purchase order financing is a cash advance that business owners can receive on their purchase orders. This is done by a lender paying your third-party supplier up to 100% of the costs associated with producing and delivering agreed-upon goods to consumers. Once goods are in the hands of the consumer, an invoice is sent and the consumer can pay the purchase order financing company directly. Last, the purchase order financing company can deduct its fees and pays you the rest.

• Merchant cash advance. If you have consistent credit card sales, a merchant cash advance could be a good option for you. For this type of financing, the merchant cash advance company will advance you a set amount of money based on your credit card sales. You then repay that money, along with the financing company’s fee, out of your daily credit card sales. Although this might sound like an attractive option, it is one of the most expensive forms of financing.

• Vendor financing. Often referred to as “trade credit,” vendor financing can help companies acquire inventory. Essentially, the vendor loans the customer money, using that capital to purchase that specific vendor’s product or service offerings. This type of financing might be a good option if a traditional financial institution is unwilling to lend your business significant amounts of money (because your business is new or doesn’t have substantial established credit). Though, interest rates for this type of financing are often higher than traditional bank loans.

• Short-term loans. A short-term loan is an unsecured personal loan that can offer quick funding for small amounts of cash. Repayment periods typically vary between  3 and 18 months. With the average short-term loan amount hovering around $20,000, and the maximum loan amount at $250,000, it can be a great alternative to inventory financing. Though, the relatively high-interest rates (between 10% - 65%) and aggressive repayment requirements (repayment will be required on a daily or weekly basis), may turn some business owners off. 

• Accounts receivable financing. Accounts receivable are highly liquid, as they are outstanding funds that should be received. Businesses can access capital for inventory based on a portion of their accounts receivable. This type of funding may be slightly easier to obtain than other types and can be particularly advantageous for small businesses that meet accounts receivable financing criteria or large companies that have highly integrated accounting and technology solutions.

With so many options available, we encourage business owners to familiarize themself with their financial position before pursuing financing. Inventory financing is designed to help businesses, not put financial stress on them. A few improvements to your credit position could make all the difference on your next business loan. 

Review your business credit history and unlock the best loans. . . visit mySMBscore now!

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