Whether you sell cars, operate a convenience store, or own a restaurant, having inventory on hand is what gives you the ability to do business—and, ultimately, drive revenue. But unfortunately, acquiring new inventory isn’t always as simple as the click of a button. When working capital doesn’t cover the costs, inventory financing gives you a way to purchase new materials or products—without laying out all the cash upfront.

But what is inventory financing? And – specifically – how does inventory financing work in your business?

Find all the answers you need and more, so you can access the capital you need to grow to greatness.

What Is Inventory Financing?

Simply put, inventory financing is a financing product that allows you to leverage your inventory as collateral for short-term access to capital. There are two main types of inventory financing – inventory loans and inventory lines of credit.

Because your inventory itself functions as collateral, you won’t have to put up other assets to receive funding. This means that if you default on payments, the lender can seize your inventory as payment.

How does inventory financing work? It allows businesses to tap into the value of their inventory, even when it hasn’t yet been sold.

Manufacturing and other companies that don’t have ready-to-purchase goods but instead have raw materials can also get financing based on these raw materials.

Rather than providing financing for the inventory’s full value, lenders will generally finance anywhere from 50-80% of the total cost.

Understand Inventory Financing With an Example

Let’s look at a real-world example of how inventory financing can help you grow.

Say that you own a local hardware and home improvement store, and it’s February. At the moment, things are slow—but spring is right around the corner. Soon, people will be lining up to buy mulch, trees, plants, and other landscaping materials and supplies.

But, because you’re in the midst of February, the slow season, cash flow is down, and working capital is spread thin. In other words, you can’t afford to purchase stock in the quantities you want to.

That’s where inventory financing comes in. Instead of missing the opportunity to land higher sales come spring, you can finance your existing inventory to obtain cash. When demand peaks, you’ll have enough inventory on hand to earn a huge profit and buy more inventory with that cash.

How Does Inventory Financing Work?

In a pinch, inventory loans (which technically aren’t loans) could be the difference between missing out on and being able to pursue a huge opportunity in your business.

If your busy season is approaching and you have an opportunity to drive sales, but no working capital to purchase products (or other inventory), then financing can give you the resources you need to do so.

Inventory financing could be a game changer for small business owners that have just started the journey. If a large order comes in, and you lack the inventory to fill it, then you can utilize your inventory to buy the necessary materials. By doing so, you can capitalize on demand instead of turning down orders due to a lack of working capital.

Or, to maximize sales during a busy season, you can finance your inventory. This allows you to receive extra cash, which you can use to purchase additional inventory and, ultimately, increase sales.

When you receive cash, your use of the funds isn’t limited. While many business owners purchase inventory, you can also put that cash toward other business expenses, like payroll, operating costs, or other costs your company may incur.

Inventory financing helps your business under normal circumstances, too. In every scenario, it’s a quick and easy way to utilize your existing assets to generate higher revenue while knowing that you’ll generate the necessary income.

The Benefits of Inventory Financing

“Can I get a loan on inventory?” Yes, you can, and here are a few of the many benefits.

  • Capitalize On Unsold Inventory – Instead of taking up space, your unsold inventory can provide access to capital.
  • Prepare for Busy Seasons – Maximize your profit by leveraging your inventory for the cash you need to operate at your highest capacity.
  • Credit Scores Aren’t Important – Your credit score isn’t a make-or-break factor because the lender can take the inventory in the event you default.
  • Increase Purchasing Power – Unsold inventory can be hidden gold. By leveraging those products through financing, you can access capital and increase your business’s purchasing power.
  • Take Advantage of New Opportunities – Opportunity doesn’t always arise at the perfect time. With inventory financing, you can quickly create liquidity, take advantage of your opportunities, and – most importantly – drive growth in your business.

Inventory financing is an advantageous method for businesses to secure funding and grow. It’s not the perfect fit for every business, but if you handle a lot of inventory, it could be a great resource to outpace your competition.

Types of Inventory Financing

Inventory financing can yield two things: inventory loans and inventory lines of credit.

Type of Financing  Description
Inventory Loans Inventory loans work much like traditional term loans, except the eligibility requirements and initial process are a bit different. Instead of a heavy emphasis on your credit score, inventory financing lenders base your eligibility on the inventory you can offer as collateral. This usually involves a valuation process, where the lender determines the liquidation value of your assets before you know how much you qualify for.

In either case, inventory loans are provided in a one-time lump sum payment that you repay through regular installments throughout the course of your term.

Inventory Lines of Credit Inventory lines of credit provide ongoing access to capital. If you secure a revolving term, you can draw the same funds again after you’ve repaid them and always have liquidity for whatever comes next.

This type of financing applies interest to the amount you draw, meaning you don’t have to pay interest on the total value of your credit line.

How Much Does Financing Inventory Cost?

Unfortunately, there’s no quick and easy answer to this question—the cost will vary for every business. Ultimately, the cost is based on the value of the inventory being collateralized, how much cash you receive, and other details about your business’s financial history, like your annual sales, credit score, and more.

If you qualify, you’ll have an agreed-upon interest rate. Then, you’ll pay back the full amount that you received, plus that interest, based on the funds borrowed.

This is significantly different from another popular type of asset-based lending product known as invoice factoring, in which accounts receivables are sold to a lender in return for a portion of their value. In this structure, customers then pay the lender directly.

Can I Get a Loan on Inventory?

Businesses that handle excess inventory might start to wonder, “Can I get a loan on inventory?”

The answer is yes! You can secure inventory financing from a bank, credit union, or non-bank lender. From there, you’ll have to choose between the two main types of inventory financing – inventory loans and inventory lines of credit, which offer flexible access to capital.

The funding amount of your loan will depend on the total value of your inventory. It’s a good idea to run these numbers yourself before approaching a lender. If you do, you’ll have more leverage during the negotiation process, which can improve your terms and, more importantly, save you from choosing the wrong offer.

Why Do You Need Inventory Financing?

Inventory financing is a way for businesses with an abundance of available stock to create liquidity for opportunities and challenges quickly.

One advantage of inventory financing is that your credit score plays a lesser role in determining your eligibility. This is because the inventory you’re leveraging for funding is often used as collateral for the financing. If you end up defaulting on payments, the lender can seize your inventory and recoup some of the lost cost.

Remember: The benefits of a financing option are specific to your business. Here are a few situations where you might not need inventory financing but another type of financing:

  • You have a long-term need for capital
  • You don’t have an abundance of inventory
  • You have inventory, but leveraging it is too risky for your business’s bottom line
  • You need ongoing access to capital, rather than just a lump sum

In short, businesses with large amounts of available stock will benefit from inventory financing the most. It doesn’t make sense for businesses without inventory to choose this type of financing, but that doesn’t mean these organizations should go without the capital they need to grow – there are many other options to leverage as you push for the next level of greatness in your business.

Is Inventory Financing Right for Your Business?

Inventory financing isn’t a one-size-fits-all approach to business growth; There are many situations where you might find other forms of financing more beneficial.

Your business may benefit from inventory financing if:

  • You mainly sell products
  • You have a large amount of inventory on hand
  • Products sell at a fast pace
  • Your business operates on a seasonal or cyclical basis
  • You have detailed records

You don’t need to check off all the boxes above, but in general, businesses that meet these criteria are the best fit. If your business doesn’t, then don’t worry – there are plenty of other business financing options that might work better.

Alternatives to Inventory Financing

Inventory financing isn’t a one-size-fits-all solution; Other financing programs may work better for your bottom line. Let’s explore some of the alternatives to inventory financing, so you can familiarize yourself with all the options available to you.

Small Business Term Loans

Term loans are the most basic type of financing, where borrowers receive a lump sum of money that they pay back over a predetermined schedule. They’re best for one-off purchases/investments, projects where you know the exact cost, and long-term financing needs.

Term Length Interest Rates Ideal for
Short or long Banks: Prime + 2%

Non-Banks w/ Collateral: Single digits

Non-Banks w/o Collateral: ~1% per month

Working capital needs, projects where you know the exact cost, one-off projects or investments

Business Lines of Credit

Lines of credit offer consistent access to capital up to a certain limit, and borrowers can use the funds for any business purpose. They’re a great resource for ongoing purchases.

Term Length Interest Rates Ideal for
Revolving (in most cases) Banks: Prime + 2%

Non-Banks w/ Collateral: Single digits

Non-Banks w/o Collateral: ~1% per month

Ongoing purchases or investments, working capital needs, when you don’t know the final cost of a project, long-term financing

Equipment Financing

Upfront equipment purchases can put pressure on your cash flow. With equipment financing, you can spread the cost over time and start using the asset immediately in your business.

Term Length Interest Rates Ideal for
Two to seven years, on average 2% to 20% Businesses that need specific equipment to operate at the highest level, one-off purchases, anyone who has an opportunity to purchase equipment in bulk and increase their capabilities

Revenue-Based Financing

Revenue-based financing leverages your business’s profitability to offer short-term funding.

Term Length Factor Rates Ideal for
Three to twelve months 1.2 to 1.5

(You’ll repay 120% or 150% of the amount borrowed)

One-off purchases or investments, when you know exactly how much a project will cost, short-term financing needs

Apply Now to Consider Your Financing Options

Many lenders that offer inventory financing insist that borrowers have years of proven sales history and excellent credit.

At National, however, we pay closer attention to what your business is doing right now and how a new opportunity could help you reach the next level.

Even with only six months in business and credit challenges, you can still find excellent options that will help your business grow.

Here’s how it works:

Apply & Connect

Complete our digital application in minutes, then connect with our team. We learn everything we can about you, your business, and your goals to ensure we’re able to find the right solution for where your business is headed.


Once we’ve learned everything we can, we leverage our diverse 75+ lender marketplace to find multiple options for you to choose from. All of the options are personalized to your needs, and we explain how each solution could work in your business if you were to choose it.

As industry experts, we leverage our experience to offer ROI guidance, help you choose the best type of inventory financing for your situation, and advise on how to use your financing to drive the best results.

Get Funded

With your money in hand, you can take advantage of opportunities and tackle challenges with confidence.

To get started, apply now!