For retailers, having the right stock and healthy levels is everything. However, you need money to buy inventory before you can sell it. That’s when inventory finance comes in, helping retailers invest in stock to generate revenue without impacting cash flow or dipping into reserves.

In this article, we outline the key details you need to know about inventory financing, how to use it in your business and the pros and cons to consider.

‍

What is inventory financing?

Inventory financing (also called warehouse financing) is a type of short-term business loan using inventory as collateral to obtain funding. This can be invaluable in the fast-moving world of retail, especially ahead of busy holiday seasons and key sales periods.

Retail cash flow can be complex, with cash tied up in assets (inventory) until it sells. Until that point, that capital is stuck (illiquid), making it hard to buy new stock until the old stock is converted into revenue.  

This can be frustrating, but inventory finance (be it loans, lines of credit or asset-based lending) solves this problem. It allows retailers to access extra capital to boost stock levels and maximise opportunities at key times in the year.

What is an inventory loan?

An inventory loan is a type of secured loan specifically designed to help businesses purchase inventory. Unlike traditional loans, an inventory loan uses the inventory itself as collateral, making it easier for small businesses to get the funding they need to buy new products.

How does inventory finance work?

Most businesses use inventory finance as a way to buy more stock. This could be to fulfil a large order, prepare for an event or get ready for the start of a busy season. By leveraging the value of your current or to-be-purchased inventory, you can secure a loan to purchase the additional stock needed to meet customer demand.

‍This can be a game-changer for small businesses, helping you manage cash flow, respond to demand and prioritise high-value items without waiting for existing inventory to sell.

Decide how much of your inventory you want to use as collateral. Inventory finance lenders typically offer a percentage of your assets’ value as a loan. The capital provided can be used to purchase new inventory, with the loan repaid in instalments (as you sell new inventory). Interest rates, fees and repayment terms vary depending on the lender and the type of inventory finance.

After repaying the loan, you may take out new inventory financing and start the cycle again, or use a revolving line of credit.

‍

How does inventory finance help improve inventory management?

Inventory finance helps businesses enhance inventory management by providing fresh working capital for stock that enables greater agility and purchasing power, while unlocking benefits such as:

• Better demand planning and fulfilment
• Reduced risk of overstocking or stockouts
• More cash flow for keeping operations running smoothly
• Cost savings from opportunities to bulk buy certain stock

• Reduces the risk of overstocking and waste
• Scaling inventory with business growth

Main types of inventory finance

When funding your inventory purchases, there are a few options your business could consider. Here are the most common types of inventory finance to explore: 

• Inventory loans: Short-term business loans provide a lump sum that you can use to purchase inventory. These inventory loans are typically repaid over a shorter period, usually within a year. Rates and terms depend on the value of the collateral used as security, your creditworthiness and other key financial factors that lenders will evaluate.
• Inventory lines of credit: Unlike a lump-sum loan, a business line of credit enables you to draw down a proportion of capital, as and when needed, offering more flexibility for managing seasonal or fluctuating stock requirements. Interest is usually only charged on the amount used, while using a revolving credit facility provides ongoing access to funds for purchasing inventory. 
• Trade credit: This form of supplier financing, where goods are provided upfront with payment deferred for an agreed period (30, 60 or 90 days, etc.), allows businesses to generate revenue from inventory before paying suppliers, easing cash flow and simplifying processes.
• Purchase order and invoice finance: Purchase order (PO) finance allows businesses to receive upfront funding to pay suppliers for large customer orders before receiving payment themselves. Invoice finance provides an advance on unpaid customer invoices. Both help bridge cash flow gaps between purchasing inventory and receiving payments.

Inventory loans vs lines of credit

While inventory loans are straightforward and provide predictable repayments and funding terms, lines of credit offer added flexibility. With a business line of credit for inventory management, you get an approved maximum credit limit from which you draw funds as needed up to that limit. 

You only pay interest on the amount you actually use, making it a versatile solution for managing ongoing inventory needs.

‍

Inventory finance providers

Various providers offer inventory finance solutions to UK businesses, each with different specialisms and lending conditions. Here are a few leading inventory finance providers you may want to explore:

• Close Brothers: Offering stock finance solutions as part of its Asset-Based Lending (ABL) structure, including invoice discounting, particularly for manufacturing and service-based businesses. 
• IGF (Independent Growth Finance): Delivering inventory finance solutions through its ABL model, plus cash flow loans, for growing UK businesses with a turnover of £3 million and above.
• Bibby Financial Services: Providing inventory finance and asset finance for working capital needs, including dedicated solutions for construction businesses.

This is just a small number of inventory finance providers, while banks like HSBC also offer finance solutions to support inventory management. So, do your research and compare different lender features, benefits and conditions to see which might best suit your needs.

‍

Inventory finance example in practice

Let’s say you run a toy business. It’s September, and Christmas is just around the corner. You’re hoping this will be a record year for you and want to build up a large supply of toys before the festive season begins.

You already have some toys in stock and decide to use them as collateral to take out a loan against inventory. This way, you can buy even more despite knowing you won’t start selling them until nearer Christmas. Once you’ve secured your finance, you get to work buying materials and assembling new toys.

As December approaches, sales skyrocket as expected, and you begin paying your loan until you’re all square with your lender.

‍

Advantages and disadvantages of inventory finance

We’ve focused on the types of inventory finance available and how they work, including some of the key features and benefits. But let’s outline the main advantages of using inventory financing and the potential drawbacks you should also consider:

Advantages of inventory finance

• Inventory finance frees up funds tied up in your inventory, rather than waiting to sell it.
• Since your inventory serves as collateral, there’s no need to put up other business assets or personal guarantees.
• Using inventory as collateral makes inventory finance solutions more attainable if you have poor credit or you’re a newer business.
• Inventory loans are typically fast to secure, once approved.

Disadvantages of inventory finance

• Inventory finance can come with higher interest rates compared to traditional loans, especially if your business is perceived as high-risk.
• The value of your inventory can fluctuate, especially for perishable goods or products subject to market trends – if the value decreases, you might face challenges in repaying the loan.
• Lenders will often only cover a certain percentage of the stock value, which means a ceiling on the amount you may be able to get from lenders.

Which businesses can benefit the most from inventory loans?

Business inventory loans are particularly beneficial to those with a pressing need for finance but who may struggle to get credit elsewhere. Growing companies that sell in-store or online can use loans against inventory to borrow with favourable terms and interest rates.

Since the repayment of the loan will depend on your ability to sell the inventory in question, it’s best to use inventory finance for stock that you’re confident will sell during the loan period.

How to apply for an inventory loan

Applying for an inventory loan can be fairly simple if you know what to expect and do the necessary planning and preparation of documents and financials.

Here are the main steps involved in applying for an inventory loan solution:

• Scope out your funding needs and explore and compare inventory financing options and lenders.
• Determine the most suitable form of funding and check eligibility criteria on prospective lender websites.
• Prepare various information and documentation – finance lenders will usually require some of the following:
  
  • Financial statements (including profit/loss and balance sheets)
  • Recent tax returns and liabilities
  • Details of existing credit facilities
  • Inventory records (valuation reports, turnover rate and purchase orders)
  • Cash flow, forecasting and projections
  • Business plan, funding purpose and growth strategy
• Apply for financing online via inventory financier websites, over the phone or via finance brokers, providing the necessary details and responding to any required due diligence requests. 
• Await lender assessments and approval decisions – lenders will typically review your creditworthiness, financial health and track record, asset value/inventory details and key business details.

If you receive a formal inventory loan offer, carefully consider the financing terms, rates and fees before signing an agreement (with the support of an accountant or legal expert). You should receive the funds within a few days, with most lenders. 

‍

Inventory finance alternatives

If you’re looking for alternative finance solutions, including lending agreements for more than just inventory purposes, there are several options to explore.

Here are some alternatives to inventory finance to consider:

• Asset finance: Hiring and leading agreements to spread the costs of new assets and equipment, freeing up cash flow for operational needs.
• Overdrafts: Handy credit facilities to dip into as and when required up to an agreed limit, without fixed repayment schedules.
• Lines of credit: Sums of capital to draw from, repay and top up, to balance cash flow and working capital with fast access to finance in key periods.
• Merchant cash advances: Revenue-based funding where advanced capital is repaid as a percentage of future card sales.
• Flexible business loans: Typically unsecured loans from digital lenders that offer quicker access to capital and repayment terms aligned with cash flow.

Using fast and flexible loans for inventory needs

If you need fast access to finance to purchase inventory, when required, and much more, iwoca’s Flexi-Loan offers flexibility, transparency and quick and easy applications, without the need for using business assets as collateral.

Key benefits include:

• Fast access to funds: Online applications take a matter of minutes, and you can expect an approval decision within 24 hours.
• Flexible borrowing and repayments: Borrow £1,000-£1 million for a few days or up to 60 months, and only pay interest on the funds you draw down. 
• Designed for SMEs: Terms are tailored to your needs to help you invest in new stock, bridge cash flow gaps and empower business growth.

Our loans enable businesses to be more agile, manage stock control more efficiently and maximise impact in key sales periods with funding that flexes. Plus, we don’t charge for early loan repayments.

Also, as a fintech provider for small businesses, we offer streamlined payments and trade credit solutions and through iwocaPay, which supports smoother supplier relationships, making inventory and cash flow management even simpler. 

Learn how to apply for a business loan with iwoca and use our loan calculator to work out your likely repayments.