What is Inventory Finance?

Inventory finance is a form of short-term borrowing that allows businesses to purchase extra stock without paying upfront. This can free up cash flow for other areas, help growth or prepare for a busy season. But what is inventory financing exactly, and how does it work? Let’s dive in.

How does inventory finance work?

Inventory financing is a type of asset-based lending where a business get a loan to buy inventory (eg products, materials or parts) and then use that stock as collateral. 

A lender appraises the value of the relevant inventory and then offers to lend the business a percentage of that value. The borrower will then repay that loan over time, with interest. If they default on the loan, the lender will then seize the inventory that was being used as collateral and sell it to recover the funds.

Inventory finance is useful for businesses that need to bridge a gap between buying inventory and making sales from it. It can be referred to as ‘Warehouse finance’ and is common among wholesalers, retailers and manufacturers. 

• Expand product lines 
• Bulk buying to get a discount
• Having less commonly used or specialists parts on hand 
• Reserving cash flow for other needs

Advantages and disadvantages of inventory finance

Advantages

• Access to capital to keep inventory levels high and react to consumer demand effectively and efficiently.
• Access to capital tied up in inventory
• It’s a great way to help meet seasonal demand and keep a steady cash flow
• Useful way to keep specialist items with lower demand in stock

Disadvantages

• Reduces profit margin
• Could be difficult to attain for new businesses with minimal trading history
• Lenders may not provide the full amount needed to purchase the required inventory

Summary of inventory finance

Inventory finance can be a valuable tool that businesses can use to maintain their operations and respond to market demands. However, like all financing options, it carries risks and rewards and will only make sense for certain businesses.

With careful consideration and strategic use, inventory finance can help drive growth and stability. But there are several alternatives to consider.

Inventory finance alternatives

Revenue-based loan: A revenue-based loan offers funds based on a company’s gross revenues. The repayments are a percentage of ongoing sales.

Trade credit: Suppliers provide goods on credit, allowing the business to pay later. This can ease cash flow constraints without having to apply for a loan.

Business credit cards: Business credit cards can provide quick access to capital, with the added benefit of rewards or cash back. They can be used for various expenses, including purchasing inventory. 

Working capital loan: A term loan can help you access extra funds that can then be used for almost any business purpose. This gives you more freedom and control over your finances and assets. 

How Funding Circle can help

At Funding Circle we offer a variety of products to suit different needs, from business loans to short term lending.

Funding Circle business loans

Borrow from £10,000 to £500,000 over up to 6 years. All loans are fixed rate and come with no early settlement fees. 

Asset finance

Borrow up to £5 million to fund new equipment, vehicles, machinery or other assets through our partners.

FlexiPay

Spread the cost of business bills, invoices and more over 3 months with a line of credit of up to £250,000. Includes options to pay by business credit card or transfer directly to a supplier.

30/10/23: While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.