Great for —

• Companies with strong inventory management and sales performance that have a primary need for buying more inventory.

• Financing seasonality in a business by allowing the company to purchase more inventory in preparation for a higher sales season.

• Managing vendors that have short payment terms and require payment before the business is able to start selling inventory to customers.

• Provides an option for businesses to use inventory as a basis to access funding when they may not have other assets or history to get traditional debt.

• These are typically structured as lines of credit and can be advantageous to businesses because it can be borrowed and paid back when needed. Companies won’t pay any interest if there isn’t anything borrowed on the line of credit. 

Things to Watch Out For —

• These loans almost always come with an audit or exam of the inventory to understand accuracy of accounting, resale value, and logistics. Lenders will require the company to pay for a third party to perform these services. It will be important to understand the cost and the process before agreeing. 

• Lenders will not let lend the full value of the company’s inventory. Loans are usually based on types of inventory and a percentage of inventory. The types of inventory that are easiest for lenders are raw materials or finished goods that have value without a brand or additional development. 

• In-transit inventory is typically excluded from inventory that you can borrow against but could be included if you have shipping insurance. 

• On lines of credit, lenders might try to charge a fee if you are not using the line of credit. If you are expecting to use this seasonally or only as a safety net, you will want to look at the unused line fee to make sure you aren’t paying a high cost for something that might not be used often.