How Inventory Financing Can Unlock Sales Opportunities and Cash Flow
In March 2025, the U.S.’s trade deficit reached a record high as imports surged to nearly $343 billion. One of the reasons for this unprecedented number? Businesses were stockpiling inventory before the global tariffs hit. But what if you didn’t have enough funds to buy in bulk?
This is where inventory financing can become a lifesaver.
Inventory financing allows you to borrow money against inventory you either own or would like to own. You can maintain your inventory levels without affecting your cash flow or draining your working capital.
In this article, you’ll learn more about inventory financing, including:
How it works
Where you can apply for this type of funding
The pros and cons
The main types of inventory financing
How Does Inventory Financing Work?
Inventory financing is used to borrow against your existing or purchased inventory.
This funding can either be in the form of a term loan or a business line of credit that uses your inventory as collateral. The main benefit of inventory financing is that retailers, wholesalers, and seasonal businesses can plan ahead and stockpile inventory to meet anticipated customer demand or supply chain disruption.
For example, you might want to use loans to avoid tariffs by stockpiling inventory if these taxes have been paused or are yet to be implemented in your suppliers’ regions. However, in order to be agile, you need enough capital available to respond to these fluctuations.
To qualify for inventory financing, you need to meet lenders’ eligibility criteria. The good thing is, since your inventory serves as the collateral, the requirements are generally less strict.
For example, some lenders may consider businesses that have been operational for only six months or have lower credit scores. That said, the longer you’ve been in business and the higher your credit score and annual revenue, the more likely you will get approved and with more competitive terms. Providing an updated and detailed inventory list and demand forecasts can also increase your chances.
In terms of the loan amount, it’s typically a percentage of the total inventory value. If borrowers are unable to pay off the loan according to the terms and conditions, the lender will seize the purchased inventory and sell it.
Where Can You Get Inventory Financing?
Inventory financing is available from traditional banks, credit unions, and online lenders. Sometimes, suppliers team up with financial institutions to offer their own branded service.
Each lender has their own criteria, lending terms, and interest rates. Banks and credit unions generally provide higher loan amounts and lower interest rates, but they have more strict eligibility standards, and it takes them longer to make decisions.
Meanwhile, online lenders offer much faster turnarounds on decisions but may charge higher interest rates because they take on more risks.
The Benefits and Drawbacks of Inventory Financing
Convenient and streamlined processes are what make inventory financing attractive to business owners. The main benefits are:
Fast application process: Some lenders have online platforms where you can set up an account in minutes. Approval and disbursements can also happen within hours.
No equity dilution: Some entrepreneurs do equity financing, where they give away stock to raise capital to buy inventory. However, this means they own less of the company. This can be avoided through alternative funding, like inventory financing.
Better supplier relationships: With enough funds to increase your orders and pay on time, your suppliers might offer lower prices and more generous terms.
Improved business credit: If you manage your account well, this will improve your business credit score, making it easier to apply for other types of financing in the future.
While this business financing is more accessible, there are some factors to consider. The main drawbacks are:
Limited funding: Lenders don’t offer up to 100% of the value of the inventory you hold or wish to purchase. You may only be offered half of what the stock is worth.
Personal risk: Owners of newer businesses may be required to sign a personal guarantee, which may put at risk any personal assets you pledge as security.
Restrictive covenants: Restrictive covenants limit your ability to borrow money from other lenders, and this can be a requirement for some financing providers.
Expensive funding: Compared to standard bank loans, interest rates on inventory loans and business lines of credit can be much higher.
5 Main Types of Inventory Financing
Below are the different forms of inventory financing, each with its own pros and cons.
1. Asset-Based Lending
In asset-based lending, companies pledge business assets like their inventory, machinery, real estate, and accounts receivable as collateral. Financial institutions provide two forms of asset-based lending: a business line of credit or a standard term loan.
A business line of credit shares many features with business credit cards and bank account overdrafts. You have a limit, which is the maximum amount of money you can borrow.
You only pay interest on the amount you actually use. When you make a repayment, you can borrow that amount again since it’s a revolving line of credit.
Alternatively, you may be offered a standard term loan, where you’ll borrow a specific amount of money for a set period of time. The repayment terms are typically monthly payments.
Pros of Asset-Based Lending
You can borrow a higher amount of money because the combined value of the assets you offer as collateral is higher.
Depending on the quality of the assets you offer, you may benefit from lower interest rates on your facility.
Cons of Asset-Based Lending
On longer asset-based loans or lines of credit, your lender may need to revalue your assets periodically, adding to the cost.
The application process is in-depth, and you may have to submit extensive financial statements, including your balance sheet, profit and loss statement, and your tax returns.
2. Inventory Lines of Credit
Inventory lines of credit operate in the same way as asset-based lines of credit, except that they can only be used to purchase inventory. You can use this funding to meet unexpected demand spikes or stock up on fast-selling items. It can also help businesses maintain a lean inventory, which minimizes the costs of holding onto excess stock.
Pros of an Inventory Line of Credit
With access to an agreed sum of money arranged in advance, you can react quickly to changes in market demand.
Unlike a trade account you have with a supplier, you’re not restricted on which companies you do business with.
Cons of an Inventory Line of Credit
If you order stock but the demand you expected doesn’t materialize, you’ll still need to make repayments on your line of credit.
Unlike a small business loan, you can’t use an inventory line of credit to meet other business expenses.
3. Purchase Order Financing
This type of inventory financing is best for businesses that have received a large order from a client but don’t have the funds required to fulfill the order. With this type of loan, the finance company pays your supplier the value of the inventory you’re buying.
When you sell all your new inventory to your client, you then repay your lender. An example of the type of business that can benefit from this financing is a small office furniture supplier that receives very large orders to furnish a corporate client’s building.
Pros of Purchase Order Financing
You can take on large orders that you couldn’t manage otherwise.
Many lenders consider the creditworthiness of your clients when making a decision rather than your company’s credit history.
Cons of Purchase Order Financing
Fees can be high, which will reduce your profit margin.
You can only fund orders for the specified client, so this is not a long-term or flexible financing option.
4. Loans for Inventory
Loans for inventory (or inventory loans) are short-term loans that retailers, in particular, use to buy stock. These loans are best-suited to businesses that have a solid inventory management system with predictable sales volumes. Historic trading patterns should suggest that a company will be able to make repayments easily, assuming there are no disruptions.
This funding can also be used to take advantage of temporary offers, like when wholesalers and manufacturers offer volume discounts to shift their own inventory. Retailers can get the stock, sell it, and then repay the loan with customer payments.
Pros of Loans for Inventory
You can get funding upfront without negatively affecting cash flow.
Monthly repayments and interest rates are usually fixed, so they’re easier to budget for.
Cons of Loans for Inventory
If your business has a less-than-ideal credit score, you’ll pay higher interest rates.
Depending on your lender, you may be charged a prepayment penalty if you settle your loan early.
5. Loans Against Inventory
With a loan against inventory, you use your existing stock as collateral for the loan. This type of loan is aimed at helping companies manage their inventory turnover better by freeing up cash currently tied up in stock.
Like inventory loans, loans against inventory are short-term loans. You receive a lump-sum payment upfront and repay it in monthly installments over an agreed time period.
Loans against inventory are useful for businesses that stock high-ticket items where the turnaround time on stock may be slow, such as specialized machines. This funding is also often used to meet operational costs like payroll or rent.
Pros of Loans Against Inventory
Payouts on loans against inventory are quick because you offer lenders collateral.
You can keep your current inventory instead of selling it at a discount.
Cons of Loans Against Inventory
The amount you can borrow is based on the current value of your inventory. Items you bought may not be worth what you paid for them anymore.
There may be a delay in getting funding because many lenders will want an independent valuation.
Get Timely Financing With Backd
Inventory financing helps you manage your working capital to anticipate your business needs. With Backd’s working capital products, you can get funding that can be used for any purpose, including inventory purchases.
Our Business Term Loan* offers up to $1.5 million and terms extending up to 24 months. Meanwhile, our Business Line of Credit provides up to $1 million and terms up to 12 months.
To protect your credit score, we do a soft credit pull during the application process.**
Our eligibility requirements include:
$100,000 monthly revenue
650+ credit score
Established business credit
Based in the U.S. with a brick-and-mortar address
Been in business for two years for a Business Line of Credit and one year for a Business Term Loan
Apply now and receive a funding offer within as little as 6 hours.***
*Loans are decisioned and funded by one of Backd's lender partner banks.
**Your application, including the amount, cost, and approval, is subject to review and is not guaranteed. Terms and conditions subject to change without prior disclosure or notice.
***Decisions and funding may take additional time and not be same-day. Additional information may be required. Time to receive funds varies based upon your financial institution's receiving schedule and operating hours.
