Inventory financing allows you to leverage existing inventory to secure additional working capital. The amount of money you can qualify for is primarily based on the percentage of the total inventory value to be put up as collateral.

The amount of money you can borrow against your inventory varies depending on the following factors:

• Your industry
• Type of inventory used as collateral
• Inventory churn

Inventory financing is commonly used by companies with large quantities of inventory, like wholesalers, retailers, construction, and more. You can use the funds for almost any business purpose, including preparing for the peak season, expanding product lines, securing additional capital to keep up with customer demand, and unlocking capital tied to unsold or unused inventory. Inventory Loans are known as inventory financing loans. Like a conventional small company loan, inventory loans are for a particular quantity that is repaid in monthly payments over a set repayment term or in one lump sum after the inventory is sold. You will be liable to repay the entire loan amount, and if you require additional funding, you will need to take out another small company inventory loan. Inventory Collateral loan defined as all inventory of the Lender and Creditor, or in which the Borrower or Guarantors have rights, as to if now purchased or hereafter acquired, wherever located, including, without restriction, all goods of the Lender and Creditor held for sale or lease or furnished or to be fully equipped under contracts of service, all goods kept for display or demonstration, goods on lease or shipment, returned and foreclosed properties goods, all raw materials, work-in-progress, all returned and repossessed goods. Inventory Collateral Loan purchases may be available from traditional banks, such as those that offer the SBA loan. They’ll appraise the worth of the merchandise you want to buy and calculate how much money you can borrow.

Types of Inventory Financing

Whereas both types of inventory financing use your inventory as security, these two loan types have significant implications for your business’s future funding.

• Inventory Loan

• Inventory Line of Credit

The most common types of inventory used for inventory financing are raw materials, works in progress (WIP), and finished goods.

These types of inventory have value, but for lenders, some are more valuable than others. The rule of thumb is that the more liquid your inventory, the higher your loan-to-value (LTV) ratio. In the event that you are unable to repay the loan, lenders will sell the inventory you placed as collateral. The easier it is for them to sell it, the higher its value.

Raw materials are generally very easy to liquidate, which makes this type of collateral an appealing form of inventory for inventory lenders to consider for collateral. As long as there is a market for the sale of the inventory products, finished goods inventory can be an attractive form of inventory to use as collateral to secure inventory financing.

However, work in progress or WIP inventory is usually not as valuable to lenders because they’re usually sold for just the melt-down or material value of the products, which could be valued at only pennies on the dollar, depending on the type of product.

Speak with our Lending Advisor Today to learn more about inventory financing!

You’ll need the following documents to apply for inventory financing at SMB Compass:

• 1 Page online loan application
• At least 6 months’ worth of bank statements
• At least 2 years in business

Note that we may ask for additional documents if needed, such as profit and loss statements, balance sheets, A/R and A/P aging reports, inventory reports, and more. Our financial experts will advise you on the documents you need to submit.

Your lender will conduct field audits and inventory valuations as a part of the funding process. This process determines the final approval and loan amount of your inventory financing line of credit.
During the field audit, the lender, or a representative on their behalf, will visit the location of the inventory to evaluate the value of the collateral that will be used to secure the funds. This audit will determine how much money the lender will offer for the inventory as collateral, and this is usually based on the amount that the inventory could be sold for in case the borrower defaults on the loan. After the reports are received and the final approval is issued, you may be able to borrow up to 80% of the appraised value of the inventory.
You will receive a term sheet that outlines the inventory loan amount, the advance rate, interest rate, and other associated fees. If you accept the terms and sign the sheet, you will need to make a deposit for the field audit and diligence.

Yes, inventory financing is a specific asset-based lending product. The collateral required for inventory financing is the inventory that the loan is being secured with. The type of inventory being used as collateral and the liquidation cost of the inventory both play a large role to determine the necessary collateral.