Inventory Financing

Inventory financing is a widely used option for consumer product companies or dealerships looking to use their inventory as collateral to secure a loan, freeing up the liquidity that keeping those products in stock denies them.

When a company needs cash flow for expansion, turning to inventory financing is a common alternative to approaching a traditional bank. The process involves obtaining a loan based on the value of the products sitting idle in storage, allowing the business to use that money for growth—such as increasing inventory to meet an expected rise in sales.

As the products begin to sell, the business owner can repay the portion of the loan tied to the items sold or reinvest the funds into purchasing more inventory (for example, a dealership might need additional cars to meet customer demand).

When the loan is granted, the lender requires a contract that gives them ownership rights over the inventoried products. This ensures they can take possession of the goods if the borrower fails to meet the repayment terms outlined in the loan agreement. In essence, this type of financing is a form of pledging the company’s products, which are intended for sale.

Before finalising the deal, a check is conducted to ensure the products offered as collateral are durable, identifiable, and likely to sell at market value. However, stored goods—especially items like cars—often depreciate over time, meaning the loan amount typically won’t cover the full value of the inventory.

The ideal time to seek this type of financing is when your inventory is selling well and you anticipate an uptick in future sales. If the inventory isn’t moving as expected, it might be hard to find a lender willing to provide the loan.

Throughout the financing contract, the company must track the products in storage, and the lender may also carry out inspections to ensure the loan is performing as intended and the value of the goods is being maintained.

Additionally, it’s essential to present the lender with a business plan detailing how the loan will be invested and outlining your strategy for repaying the funds provided.