How to Secure Financing With Your Inventory as Collateral

How to Secure Financing With Your Inventory as Collateral

2 Comment

Inventory financing is among the many ways in which you can secure funds to grow your business.

In addition to checking your business credit report, company history and other details to determine whether your company qualifies for financing, most lenders will want see what you can use as collateral to guarantee the loan. These assets give lenders assurance that you can repay the loan amount via a second source of potential value in the event your first source isn’t sufficient.

In this respect, inventory financing is similar to getting a mortgage for your business’s storefront or office space. A lender gives you funding to purchase an asset, but instead of the asset being a storefront, it’s your business’s inventory. Instead of your storefront serving as the collateral, your newly purchased inventory becomes the collateral. Your goal is to sell those products to repay the loan. In the event you cannot make your payments, the lender takes ownership of that inventory.

The Benefits of Inventory Financing

This form of financing is particularly helpful for startups. Not only can it be used to purchase actual products, but it can go toward buying raw materials to create products. When a business is starting out, it may not have the funding necessary to stock its shelves and handle the many other expenses that come with getting a company off the ground.

Inventory financing is also particularly helpful for businesses like retailers and wholesalers. These businesses can have a high level of perceived risk in the eyes of a bank, and a loan of this nature could be less costly than seeking a loan from a non-bank lender.

Inventory financing can be use to restock merchandise before an upcoming busy season. Prior to the holiday shopping season, for instance, some businesses may go through a slump and lack the funds necessary to replenish their products before consumers are ready to shop. Companies can get loans for their merchandise, rack in holiday sales, repay their loan amounts and pocket whatever’s left.

The Challenges of Inventory Financing

While this option may appear attractive to business owners, lenders identify pitfalls to inventory financing and often consider this a form of an unsecured loan. You get the funds with the expectation that you can sell the merchandise within the prescribed repayment period. However, if you cannot, there’s no guarantee the lender will have success selling the products either.

Given the amount of risk lenders assume, certain products will not be eligible for financing. Businesses whose products are eligible might face a high cost to financing because of the assumed risk. Lenders may require regular reports on the values of some inventory to ensure it can be sold at a price sufficient for loan repayment.

Financial Health—signup free

Pro Tip: Take charge of your financial health today with a FREE Nav account. We'll protect and monitor your personal and business credit, so when it comes time to find financing you're prepared on all fronts.

Inventory financing can be a good short-term loan option for a businesses expecting a surge in demand, but be sure to evaluate other options before settling for a loan that is less than optimal for your business. A business line of credit from a bank or a vendor with whom your business has a solid relationship could prove to be less expensive and easier to obtain.

Rate This Article

This article currently has 3 ratings with an average of 5 stars.

About the Author — Lydia serves as Content Manager for Nav, which provides business owners with simple tools to build business credit and access to lending options based on their credit scores and needs.

Have at it! We'd love to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and protect yourself. Refrain from posting overtly promotional content, and avoid disclosing personal information such as bank account or phone numbers.

Reviews Disclosure: The responses below are not provided or commissioned by the credit card, financing and service companies that appear on this site. Responses have not been reviewed, approved or otherwise endorsed by the credit card, financing and service companies and it is not their responsibility to ensure all posts and/or questions are answered.

Leave a Reply

Your email address will not be published. Required fields are marked *

2 responses to “How to Secure Financing With Your Inventory as Collateral

    1. Nathan, thanks for the feedback. I can see how the post title was a little confusing. The article was written to let business owners know they can use their inventory as collateral to boost their chances of getting approved for financing. Getting affordable business loans is so difficult these days and lenders want as much “protection” as they can get — inventory can be a form of collateral that helps gets things approved. For more information on different business financing types, check out this link: https://creditera.com/business-financing-options/