ABC FinanceBusiness loansInventory Financing

Inventory Financing

If you’re looking to raise funds quickly, you could take secured or unsecured inventory financing. Get the best deal with ABC Finance.

FIBA Member
Excellent Trustpilot rating

Over 30,000 loan-seekers helped

5* Rated Business Loan Broker

Receive your funds in as little as days

Market-leading interest rates

Experienced Business Loan Advisors

No Broker Fees

ABC Finance Smiling Team Member

Author: Gary Hemming CeMAP CeFA CeRGI CSP

20+ years experience in inventory financing

What is inventory finance?

Inventory financing is a type of short-term business loan used to purchase inventory such as materials or goods. This financing method allows companies to acquire goods for sale without impacting their working capital, ensuring that they have enough products available to meet customer demand. 

The inventory purchased can be used as collateral to secure the loan, providing a safety net for the lender.

Retail, manufacturing and wholesale businesses with seasonal fluctuations frequently use inventory financing when buying large amounts of stock rather than tie up cash flow.

How does inventory financing work?

The stages of inventory financing generally work as follows:

Application

The business applies for a loan, or line of credit, through a specialist lender that offers inventory financing. Using a financial broker to help match your business to a lender with experience in this area is advisable given the wide range of finance options.

Valuation

The lender assesses the value of the inventory that will be purchased and any existing inventory that will be used as collateral. The valuation of inventory is key to the loan and so it is important to provide as much detail about the stock being purchased as possible. In most cases this is straightforward and the value of the stock can be independently researched online. 

In some instances, if raw materials are being purchased to make goods then valuation can be more complex; however, specialist lenders have experience of working with a wide range of companies and will be able to approximate the value of the goods.

Approval

Typically the lender will offer 50% to 80% of the inventory’s value based on their assessment. The percentage offered is known as the advance rate. 

Disbursement

The funds are transferred to the business either as a loan, or a revolving line of credit, to enable them to purchase the necessary inventory.

Repayment

The business repays the loan or line of credit according to the agreed-upon terms. Interest and fees will be included in the repayment amount.

Financing inventory – an example

An example of a company using inventory financing is a television shop that needs to stock up on televisions (inventory) before the World Cup. The company forecasts a significant increase in sales based on previous sporting events yet doesn’t have sufficient cash flow to buy the necessary inventory, in this case televisions, that will be expensive.

The business applies for inventory financing through a lender showing clearly the reason the funding is required. The lender evaluates the company’s current and projected inventory value and offers a £200,000 loan with the inventory serving as collateral. 

The amount a lender will give a business is based on an estimate of the inventory and also on a liquidation value (LV). The liquidation value is what the lender could sell the televisions for to recover their money if the retailer defaults. In this instance, if the lender estimated that the televisions could be sold for £250,000 they would offer £200,000 and this is 80% of their likely sale value. In most cases a lender will offer 50%-80% of inventory value.

It should be noted that the LV will always be calculated to be less than the full retail value of the goods.

When the retailer receives the funds, they purchase the televisions, and start selling the items. As sales increase, the loan is repaid according to the agreed-upon terms. 

Types of inventory finance

There are two main types of inventory finance and these are:

Traditional business loans

A lump sum of money borrowed from a lender that is paid back in instalments, with interest, over a specified period. As the inventory is used as collateral, inventory financing is a secured, asset-based loan.

Revolving line of credit

This is a flexible financing option where businesses can borrow, repay, and re-borrow up to a pre-approved limit as and when they need it.This type of debt facility is commonly left open by lenders as long as the account is managed well. Many businesses find revolving credit useful as once it is set up there is no need to seek approval to use funding as opposed to loans that need to be applied for separately each time they are required. However, the interest charged on a line of credit is not largely determined by the risk-value of the goods being financed, it is more likely to be determined by the risk of the borrower.

What are the pros and cons of inventory finance?

Pros

Liquidity

Using this type of finance allows businesses to maintain liquidity and cash flow without depleting financial reserves to purchase inventory.

Sales growth

Businesses can make bulk purchases to meet consumer demand, potentially increasing sales and profits. This can be particularly useful for seasonal businesses where higher sales are predicted.

Flexibility

With a line of credit, businesses can draw exactly what they need, when they need it rather than having to reapply for loans.

Cons

Some key points to consider before choosing finance are:

Cost

Inventory financing can come with high interest rates and fees. 

Risk

If the business cannot sell the inventory, it might struggle to repay the loan.

Collateral

The inventory serves as collateral that means the lender can claim it to sell and pay off the debt if the loan terms are not met.

Will my company be eligible?

Eligibility for inventory financing can vary depending on the lender, but common criteria include:

  • Credit History: A solid credit score can improve chances of approval.
  • Financial Statements: Proof of steady revenue and profit.
  • Inventory Value: Sufficient asset value in existing or expected inventory.

What are the alternative types of business financing?

Secured loans for businesses

Secured loans for businesses are based on assets or ‘collateral’ so the lender will have confidence that monies can be recouped if the business defaults on payments. Often assets such as property, or merchandise are used to secure loans.

Interest rates on secured loans are often lower as there is a guarantee that the lender will get their money back; however, with long term secured loans interest rates can be higher as a lender is tying up funds for a long period.

Unsecured loans for businesses

Unsecured loans for businesses are a type of credit that isn’t based on assets such as property or stock. Lenders will assess the creditworthiness of a business and the likelihood that they will be able to pay back the loan. Unsecured loans are often shorter term arrangements.

This type of loan is considered to be higher risk as the lender does not have certainty the payments could be met, or that they will receive their money if the business defaults on the arrangement. Unsecured loans ordinarily have higher interest rates than secured loans.

A Merchant Cash Advance (MCA)

A Merchant Cash Advance (MCA) is a form of credit, however it is only available to businesses that accept debit and credit card payments. Finance is provided in exchange for a percentage of credit and debit card sales revenue. It should be noted that there may also be additional fees to pay when entering into an MCA agreement.

Invoice finance and factoring

This allows you to use your outstanding invoices to secure financing.  Factoring is where a lender will pay you directly and take ownership of the invoices, they will collect the payment and keep the payment. With invoice factoring the lender will take a fee for providing the service or a percentage of the invoice amounts.
Invoice discounting is part of the invoice finance range of options and this is where the buyer pays promptly for a discount on goods or services.
Invoice financing can help a business maintain cash flow if payments are outstanding for a long time and money is required urgently. 

Short-term business loans

Short term financing is designed for businesses with an immediate need for funds. Typically a short-term loan will range from three to 18 months, although some lenders may offer repayment periods up to two years in duration. Short term loans come in two forms, secured against collateral or unsecured. The latter will only usually be offered at a higher interest rate.

Short term loans can be secured or unsecured.

Asset and inventory financing

Asset and inventory financing, also known as warehouse financing provides short term funding based on the value of a company’s inventory or assets, helping businesses manage cash flow tied up in stock. This option is often used by smaller privately owned businesses that don’t have access to other lines of credit.

Business overdraft

A business overdraft is short-term cash injection to a business bank account. If approved by your lender, the required overdraft limit can be increased or decreased to suit your business needs. Business overdrafts differ from a loan in that interest is only charged on the amount by which the business is overdrawn. The overdraft can be repaid as your income allows, but it is worth remembering that your bank may demand repayment at any time. The lender may also charge a fee for the overdraft.

Business credit cards.

A business credit card plays a pivotal role in managing a company’s finances, and is specifically for corporate use. They are available to businesses of varying sizes, and can be used to effectively differentiate personal expenditures from business-related costs.

Although business credit cards operate similarly to regular credit cards, there are some notable differences. The most notable difference is that the borrowing limit on a business credit card is generally higher than a standard credit card, as it is based on personal income combined with the business’s revenue.

One further benefit of using a business credit card is that if repayments are made on time this can have a positive impact on the business’s credit rating.

Why work with ABC Finance?

ABC Finance business has been supporting businesses since 2000 and is regulated by the Financial Conduct Authority. Our experts work with a wide panel of lenders and take time to understand your business needs to get you the best deal; our aim is to save you money.

We offer competitive interest rates, flexible terms, and a team of dedicated professionals who understand the unique challenges and opportunities of inventory financing. Furthermore, we’ve helped over 30,000 businesses find a loan – our Trustpilot scores and reviews demonstrate how happy our customers are with our service.

Eye Icon

Want to find the best deal for you?

FIBA Member
Trustpilot Rating

Frequently Asked Questions

How quickly can I access this type of finance?

The ABC Finance team will guide you through the application process and a decision can often be made within 24 hours, however, as the loan will be based on inventory the lender will seek their own assessment of its value. 
Gathering as much information about your current stock and the stock you are proposing to purchase is important, along with your sales forecasts and financial records. 

What documents will I have to provide?

There are several steps to take before you apply for a loan. Firstly, your business will need to be registered in the United Kingdom and you will need to provide paperwork such as bank statements and tax returns to demonstrate income. 

Before applying for a loan you should prepare a business plan showing what the funds will be used for. Your business plan should be as detailed as you are able to make it and clearly show how a loan will help your business achieve its targets. 

A range of documents are needed to apply for inventory financing, although requirements may differ between lenders in most instances you will need to provide the following:

Proof of company incorporation
Bank statements
VAT returns
Inventories
Business plans

Will I qualify if I have bad credit?

A poor credit rating is not necessarily a barrier to inventory finance, especially as the stock being purchased, or existing stock, will be used as collateral. 

It is important to work with a specialist lender who understands this type of fiance and who will look at your current situation to assess what will work for your business.

The interest rates on loans may be higher for businesses with bad credit. Comparing lenders by using an experienced broker is recommended to ensure you get the best financial package for your business. 
Interest on a line of credit is more likely to be determined by the risk of the borrower rather than the value of the goods being financed as the credit facility stays open permanently. For this type of funding credit worthiness will be more important to demonstrate.

Contact ABC regulated by the Financial Conduct Authority (FCA) for a callback and discussion about your needs. With twenty years of experience in trade finance and a wide panel of lenders, we focus on getting you the right solution for your business.

Is inventory financing common in the UK SME market?


Yes, inventory financing is increasingly common as small and medium enterprises (SMEs) seek flexible financing solutions to manage growth and operational liquidity.

At ABC Finance we frequently arrange inventory financing for our business clients, this type of funding is seen as a useful tool to manage cash reserves whilst investing in the company. Inventory financing is becoming ever-more popular with seasonal businesses that have peaks and troughs in sales and find the need to purchase significant volumes of stock for short periods of time. In the UK, the last four months of the year are known as the ‘golden quarter’ for retail sales leading up to Christmas. During November and December retail sales see the highest activity with Black Friday, which originated in the United States as a day where retailers would offer discounts, now a key sales event in the UK.

Lenders see inventory financing as lower risk than unsecured loans and this makes this type of product very accessible to businesses that may struggle to get an unsecured business loan. A key benefit for businesses using this option is also that if inventory finance is used effectively it helps build creditworthiness and lenders can see that it is an effective financial arrangement. 

Can I get tax-relief on inventory finance?


Tax relief can be a complex area and the rules and so make sure to consult a financial specialist if you are looking to reduce your tax liabilities using finance.

It is possible to obtain tax relief on some loans; however, this depends very much on the financial product you choose. For tax purposes, a loan will be split into two different parts, and only one will be eligible for tax relief, here we explain how tax is applied:

Principal payments when you take a loan one part of your repayment will repay the loan itself, known as a principal payment. You will also pay interest on the loan. 

UK businesses cannot claim tax relief on a principal payment and this is because it is viewed as a ‘capital expenditure by HMRC.’ A capital expenditure is seen as something that improves the long term outlook of a business such as gaining assets, and inventory is classed as an asset.

Interest payments are tax deductible and so tax relief can be applied to this portion of a loan. It is important to demonstrate clearly what your interest costs are and this can be shown by the lender in a yearly statement.

Learn more about business loans

How do Business Loans Work?

Whether you have a new business or an established company accessing funding is essential for a variety of reasons from expanding the business to managing … Read more

Business Growth Loans Explained

A business growth loan is a type of finance that helps businesses invest and expand. Growth loans are often used to purchase new equipment or … Read more

How to Apply for a Business Loan

A business loan involves borrowing capital from a lender, which is repaid over a fixed period. It can be used for almost any business-related purpose. … Read more

Want help finding your perfect solution?

Request a callback from our team of experts at a time convenient for you.