Summary
- An inventory line of credit can give your business flexible funding to purchase stock while only paying interest on the amount you use.
- The credit is backed by inventory, which serves as collateral.
- You'll need to estimate inventory costs, choose a lender, and meet requirements that may include a minimum credit score and revenue.
- This option can work well for retailers, wholesalers, e-commerce, or seasonal businesses that need to manage fluctuating inventory demands.
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Business owners looking to increase cash flow for inventory might consider an inventory line of credit. This type of financing can work well for retailers, wholesalers, e-commerce businesses, and seasonal businesses.
In this article, we explain how inventory lines of credit work, how they differ from inventory loans, and which options work best.
What is an inventory line of credit?
An inventory line of credit is a revolving form of credit secured by your business's inventory. Unlike a traditional term loan that gives you a lump sum loan upfront, a line of credit allows you to borrow, repay, and borrow again up to a preset limit—paying interest only on what you actually use.
The inventory itself serves as collateral, meaning you don't need to put up other business or personal assets. However, if you default on payments, the lender can seize your inventory.
Types of businesses that can benefit most:
- Retail stores managing seasonal inventory fluctuations
- Wholesale businesses buying inventory in bulk before peak seasons
- E-commerce companies stocking products for sales events or growth periods
- Seasonal businesses with predictable busy periods requiring inventory buildup
How an inventory line of credit works
A business line of credit offers credit businesses can borrow as needed while only paying interest on the amount used. It's also known as a revolving line of credit.
Firms that offer small business financing may be willing to offer an inventory line of credit to a business with varying inventory business expenses. If your small business struggles to stay stocked during the busy season or keep up with customer demand, an inventory line of credit may help.
Here are the general steps that borrowers typically take to open a business line of credit:
1. Calculate how much your total inventory will cost
First, do the math to figure out how much you'll need to stock or restock your inventory. This number will inform the lender how much they should offer you in funding. Most will only cover a certain percentage of the total cost of the inventory, rather than the entire amount.
An inventory management system can be helpful in calculating your business's inventory turnover ratio.
2. Find the right lender
Now it's time to find the right financing option. If you decide to go with a line of credit rather than other small business loans, you'll want to look into lenders that offer lines of credit. Some (but not all) traditional banks will, but many online lenders do have the capacity.
When comparing options, check whether there is a draw fee that may be charged every time you access the line of credit. Also, there may be fees for origination, annual fees, or monthly maintenance, so check those as well.
3. Apply for the inventory line of credit
The application process varies by lender. Many online banks offer easy digital applications. Whether you go with a traditional bank or online lender, they'll often evaluate factors such as business and personal credit scores, your time in business, and your annual revenue. Use Nav's guide to learn how to establish business credit.
4. Get approved and use the funds
Once you get approved, you can use the business line of credit to purchase products to stock your inventory. If there's a specific draw period of time (explained below), you may only be able to use funds during that time frame.
Keep in mind that interest rates may be higher with inventory lines of credit because it's a bit riskier than other types of financing.
5. Pay back what you owe
Some lines of credit feature a draw period during which you can access the funds and only pay back interest. Then there's a repayment period when you're required to make payments on the line of credit until it's paid in full over a certain period — usually within three to 24 months for online lenders. Typically funds will become available again if you repaid the debt.
Pros and cons
Understanding the advantages and drawbacks of an inventory line of credit helps you decide if inventory financing fits your business needs.
Pros
- Flexible borrowing: Draw funds when needed and pay interest on what you use
- Revolving credit: Repay and reuse the credit line
- Inventory as collateral: No need to put up other assets
- Cash flow management: Smooth out seasonal fluctuations or meet demand spikes
- Quick access: In some cases, online lenders may fund within one or two business days, after approval, depending on the lender and your business profile
Cons
- Higher interest rates: Often more expensive than traditional term loans due to the flexible nature and inventory risk
- Limited borrowing amount: Usually only 20%–80% of inventory value, not the full cost
- Default risk: Lender can seize your inventory if you can't make payments
- Complex requirements: May require detailed inventory tracking and regular audits
- Variable rates: Interest rates can fluctuate, making budgeting more difficult
Inventory line of credit: amounts, rates, and terms
How much can you borrow against inventory?
The loan amount on an inventory line of credit depends on the kind of inventory you have and the value of the inventory. Most likely, you won't be able to borrow the full amount needed to purchase inventory.
Typically, lenders offer a wide range of between 20% and 80% of the value of the inventory. And because the value of inventory often deteriorates over time, a lender may use your inventory's liquidation value (which is likely less than its purchase value) to determine the credit limit.
Typical interest rates and fees
Inventory lines of credit often carry higher interest rates than traditional term loans because lenders view inventory as a riskier form of collateral.
Inventory lines of credit may have rates ranging from around 8%–30% or more, depending on the lender and your credit profile. Rates are not fixed and may change over time.
Fees: Here are some common fees you may encounter. Each lender may charge different fees, or none at all.
- Origination fees: One-time charge when opening the line, typically 1%–3% of the credit limit
- Draw fees: Charged each time you access funds, usually $25–$100 per draw
- Maintenance fees: Monthly or annual fees to keep the line active, often $25–$50 monthly
- Unused line fees: Some lenders charge for unused portions of your credit limit
Common repayment terms
Repayment structures vary significantly among lenders but here’s a common one:
- Draw period: Usually 12–24 months where you can access funds and may only pay interest
- Repayment period: 6–24 months to pay back principal and interest through fixed monthly payments
- Reset terms: After full repayment, the credit line usually becomes available again for new draws
How to qualify for an inventory line of credit
Meeting lender requirements is essential for approval. Here's what lenders commonly look for:
- Personal credit score: Minimum 625–650, though some lenders prefer 700+
- Business credit score: Strong business credit may help, but isn't always required
- Time in business: Usually at least 6–12 months of operations is required
- Annual revenue: Minimum $50,000–$100,000 annual revenue, varies by lender
- Inventory management system: Organized tracking of inventory turnover rates and values
- Financial documentation: Business bank statements, tax returns, and/or profit/loss statements
- Industry type: Some lenders specialize in certain industries like retail or manufacturing
Inventory loan vs. inventory line of credit
Understanding the differences between different types of credit helps you choose the right financing option:
Feature | Inventory line of credit | Inventory loan |
Structure | Revolving credit, draw as needed | Lump sum payment |
Interest | Pay only on amount used | Pay on entire loan amount |
Flexibility | High — borrow and repay repeatedly | Low — fixed payment schedule |
Rates | Often variable and higher | Usually fixed and lower |
Approval time | Can be faster with online lenders | May take longer, especially banks |
Often good for | Ongoing, seasonal inventory needs | One-time large inventory purchases |
Collateral | Inventory serves as security | Inventory or other business assets |
A line of credit is only one type of loan option you can get for the purpose of stocking inventory. Another common solution is a short-term loan from a bank or an online lender.
A business credit card can be another option, especially for businesses that don’t need a large amount of financing, or those that are newer.
Traditional lenders may not offer inventory financing because it comes with a higher risk than other types of financing. They may also take longer to fund. Some online lenders may send fund as quickly as one or two days after approval.
What are some of the best lenders offering an inventory line of credit?
The type of loan your business needs depends on varying factors. Nav’s marketplace includes lenders offering lines of credit. Nav is not a lender, and offers are based on lender criteria and business eligibility.
Line of Credit by Fundbox
Nav recommends this product as a great solution for newer small businesses looking for a fast application process and access to a flexible LOC product. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Fundbox a breeze. Only answer a few additional questions on their end and you're good to go.
Pros
- 625 minimum personal credit score
- No impact to credit score to apply (soft pull only)
- No draw fees
- Fast approval and funding, with funds available as soon as the next business day
- Use as much as you need, only pay interest on what you use
- Fundbox reports payment activity to all the major commercial credit bureaus via the Small Business Financial Exchange (SBFE), which can help strengthen a business's credit profile.
Cons
- Must have a business checking account with a minimum balance of $500
- May require large weekly payments (0.4% - 0.7% of the original draw amount per week) due to the short repayment duration.
Funding Amount
Cost
Repayment Terms
Funding Speed
Line of Credit by OnDeck
Monthly Payments and extended repayment terms (18 and 24 month terms) available. A line of credit can be a great asset to businesses who need capital on hand- fast. It allows you the flexibility to draw funds when you need it, and you only pay interest on what you use. Once approved, you can draw available funds quickly and easily without having to provide additional documentation.
Pros
- No monthly maintenance fees
- Monthly Payments available and Extended Repayment Terms (12, 18 and 24 months) Minimal paperwork
- As soon as same-day approval and funding sent by next business day
- Transparent pricing
- Use as much as you need, only pay interest on what you use
- Access available funds with one click.
Cons
- Not available in all states.
Funding Amount
Cost
Repayment Terms
Funding Speed
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Flex Line by Revenued
Revenued utilizes revenue-based financing to provide working capital to businesses based on their revenue, not traditional factors like an owner’s personal credit score. Since launching, they’ve provided over $1 billion in funding to 30,000 + small businesses. Expand your access to working capital while only paying for what you use with the Revenued Flex Line. Bonus: When you click 'Apply now," we'll securely pass over your info, making applying with Revenued a breeze. Only answer a few additional questions on their end and you're good to go.
Pros
- No minimum credit score to apply. Approvals up to $500,000. 24/7 access to funds online and only pay for what you use. No application fee, no draw fee, no annual fee.
Cons
- At least $20k in monthly deposits is required for best offer. Not available for Sole Proprietorships.
Funding Amount
Cost
Repayment Terms
Funding Speed
Line of Credit by Rapid Finance
A Line of Credit through Rapid Finance can be a great way to get flexible access to capital right when you need it.
Pros
- Fast approvals for qualified applicants with the initial draw wired as quick as the same day. No competitor payoffs required Minimal documentation required for approval Use as much as you need, only pay fees on what you draw Online customer portal to make draws and access account information
Cons
- Not ideal for startups or low monthly revenue businesses Requires an established business bank account
Funding Amount
Cost
Repayment Terms
Funding Speed
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Tiffany Verbeck
Content Manager
Tiffany Verbeck is a Content Manager for Nav. She uses her 8 years of experience writing about business and financial topics to oversee the production of Nav’s longform content. She also co-hosts and manages Nav’s podcast, Main Street Makers, to bring small business owners together to share tips and tricks with a community of like-minded entrepreneurs.
Previously, she ran a freelance business for three years, so she understands the challenges of running a small business. Also, she worked in marketing for six years in a think tank in Washington, DC. Her work has appeared on sites like Business Insider, Bankrate, and Mission Lane.