Inventory Loans for Small Businesses

How inventory financing works depends on the type of loan used to cover what the business needs. But there are similarities between the types of business funding that are most commonly used. To start, when you complete a loan application for inventory financing, all business lenders will do some type of credit check. They’ll also request other information such as your annual revenue and bank statements. Your personal credit score is usually reviewed in addition to the business’s credit.

The financing company will then determine the business’s eligibility for its products (and for how much money) based on its creditworthiness. Depending on the lender, a personal guarantee may be requested. That would mean the business owner is liable to repay the loan with their own personal assets in the event that their business assets were depleted.

You should weigh a number of factors when you consider a small business loan for buying inventory. Does it make financial sense? Or will the total amount of interest you pay consume all of the profit from the merchandise you intend to sell?

The loan terms that make the most sense for your business will be determined by the frequency of your inventory turnover. For example, if you expect your inventory to turn in three or four months, it might not make sense to borrow money with loan terms of multiple years. Longer-term loans might make it harder to maintain cash flow for future inventory if your working capital is tied up by loan repayments for too long. A short-term inventory financing loan might be more appropriate.

Keep in mind that a longer-term loan will typically have a lower annualized interest rate and lower monthly payments, but the downside is that the total cost of the loan will likely be higher. Conversely, a short-term loan may have a higher annualized interest rate and larger payment amounts, but the total cost of the borrowed funds will likely be less.

Another type of financing many small business owners use to cover inventory purchases is a business line of credit. With a line of credit, the borrower receives an available amount of credit (the credit limit) to draw funds from as needed. As the funds are repaid, the amount of available credit is replenished and can be drawn from again — without the need to reapply.

Because of the replenishing nature of the financing, this is also known as a revolving line of credit. With this type of funding, interest is only charged on the credit the business owner uses. Therefore a line of credit can be especially useful to keep on hand for opportunities to purchase inventory at a discount — particularly when you need to act fast.

Online lenders. Online lenders like OnDeck provide multiple options that can be used to pay for inventory purchases. The speed and convenience offered by online lenders is considered to be a great advantage over working with a traditional bank. Online lenders are also often able to provide funding to businesses that banks would not.

Banks. A traditional bank is a common place business owners go for small business financing. If you have a well-established relationship with your bank as well as strong financial records, bank loans generally come with more favorable interest rates. That said, many small businesses struggle with receiving approval from banks, and the application process alone is known to require a lot of time and effort.

U.S. Small Business Administration. The U.S. Small Business Administration (SBA) is not actually a lender, but they do offer great support for businesses who are unable to receive funding from other sources. If you think your business would qualify, you should explore the SBA’s 7(a) and Microloan loan programs. Either one of those would be a suitable way to help a business owner secure short-term business funding to purchase inventory.