Best Inventory Finance Options
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What is inventory finance?
Inventory finance is a type of business finance used to purchase inventory or stock. It allows a business to borrow a specific amount to purchase new stock – for example, by borrowing against the value of its current stock value.
You can use an inventory loan to buy stock, or for any other business purpose. It enables you to leverage your inventory to give you access to vital cash flow for your business and, due to the security required, is often easier to access than unsecured business finance.
Purchasing inventory is the second most common reason businesses take out a loan, according to recent business lending statistics.
Inventory finance is commonly used when:
- Payment schedules between suppliers, your business, and customers, is insufficient to effectively manage your inventory levels.
- You need to access finance to secure a limited-time offer on discounted inventory from a supplier.
- Cash flow is allowing you to trade as normal, but you need to finance additional stock to meet the demand for times of the year when sales spike.
- Regular demand for your products is increasingly high and you need to secure large amounts of stock you hadn’t accounted for.
- The business is growing and you need to expand your product line or develop a new product.
Key features of inventory finance
- Borrow from $5,000 to $1million (depending on the lender)
- Fixed or variable interest rates
- Repayments to suit your budget
- Terms from one month to five years
- Secured & unsecured options
Who is eligible for inventory finance?
- Own a business and have an ABN
- Business is GST-registered
- Citizen or permanent resident
- Minimum business-operating time of six months
- Can provide business bank statements
How does inventory finance work?
Inventory finance functions in a similar way to most business loans, except the loan amount may be secured by unsold stock or inventory:
- A business applies for inventory finance with a suitable lender
- The lender assesses the finance application to determine if the business qualifies
- The lender agrees to finance up to a certain value of the business’s required stock (e.g. 80%)
- The business and the lender agree to the finance terms and conditions
- The business receives the funds from the lender
- The business makes regular repayments until both the principal amount and any interest charges are repaid.
Inventory finance can be incredibly useful for businesses that have large quantities of unsold stock in a warehouse and need to access cash flow for their business, such as:
- Wholesale businesses
- Retail stores and shops
- Cafe and restaurant businesses
The loan is secured by the unsold stock to allow borrowers to access lower rates and better deals than through unsecured business finance. A secured inventory finance agreement also presents a lower risk to lenders, allowing borrowers with an imperfect credit score to access finance.
How to compare inventory finance options
Any business can use inventory finance, though the clear candidates are businesses that operate by selling a product, and have reserves of inventory and stock that are unsold.
Stock and inventory can be completed products, self-assembly products, or simply parts for existing products. Inventory finance can also be used by manufacturing businesses, which make and then sell on the parts to other businesses in the supply line.
We've outlined the main inventory finance options below.
Secured business loan
With a secured business loan, you use an asset (in this case the inventory) as collateral to secure the loan.
Unsecured business loan
An unsecured business loan does not require collateral. Instead it's assessed based on your business revenue. It's usually a short-term business finance option, which can make it suitable for business requiring new inventory because of seasonal demand.
Invoice finance
If you have outstanding invoices owed to you, you may be able to borrow against the value of these to purchase new inventory for your business using invoice finance.
Business line of credit
A business line of credit gives you ongoing access to funds up to a limit you agree with your lender. This can be a suitable option for financing inventory as you do not need to apply for finance each time you need funds to purchase stock. You only pay interest on the amount borrowed.
Business overdraft
A business overdraft is similar to a line of credit but is linked to your business bank account.
Bad credit business loan
If your business is not eligible for a standard business loan due to its credit history, a lender offering bad credit business loans may be an alternative source of funds for purchasing inventory.
Inventory finance case study
Type of Business: Wholesale
Loan Amount: $20,000
Case: A wholesale business has been operating for three years and has identified a spike in sales between March and April each year for a particular product.
The business has previously sold the majority of the stock during this period and has been unable to further advertise at the risk of selling out entirely and disappointing customers.
Based on this reliable trading pattern and projected revenue over this period, the business owner chooses to apply for inventory finance of $20,000, to secure additional stock and market the product during this time.
The business presents this to the lender, who finances the amount to purchase additional inventory and market the business. The business combines its increased stock and increased exposure to capitalise on the demand spike with much greater revenue.
The business owner is then able to repay the lender early, saving on fees and interest charges, while still securing a healthy increase in available cash flow for the remainder of the year.
How to qualify and apply for inventory finance
Qualifying for inventory finance is relatively simple. Most lenders will be able to provide options if you:
- Have been trading for at least 12 months; and
- Have an ABN; and
- Are registered for GST; and
- Have a clean credit history; and
- Can demonstrate business revenue is sufficient to repay the loan
Although the process will be a little more involved, if you don’t meet the above criteria you can still get approved if you:
- Are self-employed or a sole trader
- Have been trading for between 6 - 12 months
- Have an imperfect credit history
There are two main types of applications, which will depend on the amount you wish to borrow. If you are borrowing less than $100,000 the approval process will be fairly simple.
Most times, just your business bank statements will be sufficient to illustrate your monthly business revenue.
If you wish to borrow more than $100,000, your lender will require additional documentation to assess your application.
If this is the case, you’ll need to provide additional documentation to the lender so they can better assess your application. Here are some tips to improve your chances of getting approved.
If you are borrowing less than $100,000:
- Proof of identity
- An ABN and GST registration
- An acceptable credit rating — the lender will ask to conduct a credit check
- Business bank statements
- Trust Deed if the business is held in a trust
- Australian Tax Office (ATO) Portal access.
If you are borrowing more than $100,000:
- All the documentation provided if borrowing less than $100,000; and
- Financial records (provided by your accountant)
- Profit and loss statements
- Business balance sheet
If you are making an application for more than $100,000, you can speak to your bank or a lender directly to discuss your financial circumstances and need for finance.
If you are applying for less than $100,000, you can generally apply online with a number of different specialist business loan lenders, including those who provide loans designed specifically for inventory finance.
As inventory finance that is secured by existing inventory is determined by the strength of your previous trading history and value of your unsold stock, you will generally need to provide a lender with:
- An accurate, up-to-date list of your unsold stock and inventory.
- Business records that illustrate the value and frequency of your sales.
- A realistic sales forecast which illustrates how you plan to successfully repay the lender.
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Popular questions about business inventory finance
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Can I get inventory finance with a bad credit rating?
If you are applying for inventory finance, lenders will generally look at the creditworthiness and serviceability of your business, instead of your credit rating. You may be able to find lenders who will approve inventory finance even if you have a less-than-perfect credit score.
Is inventory finance better than purchasing upfront?
Inventory finance can be a way to borrow against available stock and spread the cost of a purchase over a longer-term arrangement. The benefits of upfront payment vs long-term finance will depend entirely on your business circumstances. Since you’ll be using the inventory itself as security it can be easier to access than some other forms of business finance.
What is inventory finance used for?
Inventory finance is used to acquire, develop, or manufacture new stock or inventory for a business. It is generally used by product-centric businesses to prepare for busy sale periods or to acquire large amounts of stock at a reduced price.
What counts as business inventory?
In a business context, inventory is any possession you’d record on your balance sheet, like the stock in your warehouse or the cash in your bank account.
Written by
Loans Expert
Shaun McGowan
Reviewed by
Editor
Sean Callery
