Best Small Business Inventory Loans

When you need an inventory loan, you usually don’t have a lot of time to act. This is especially true if you need to replenish near-depleted supplies, or you have been presented with a time-sensitive offer to purchase products at a discount.

Though bank loans have a longer time-to-funding (a month or longer), you can typically receive funding from an online lender in less than a week, and sometimes as quickly as a day or two.

Usually, businesses need to turn around inventory pretty quickly. For that reason, it doesn’t make much sense to take out a long-term loan to purchase inventory — you don’t want to be paying off three months’ worth of product five years from now. As a rule of thumb, it’s ideal if the inventory loan’s term (the amount of time you have to pay it off) is roughly the same as the amount of time it’ll take to sell the inventory.

Because of their short term lengths, short-term loans (STL) and short-term lines of credit (LOC) are well-suited for inventory purchases. These lending products usually have term lengths of less than a year, and sometimes as short as one month. Short-term financing can have a high APR, but because you’re paying on the loan for such a short period of time, you may still pay less for the loan than you would for a long-term loan.

Inventory purchasing isn’t a one-time thing, and if you need a loan for inventory now, there’s a good chance you will need another in the future. Some lenders offer short-term loans that are easy to renew in case you need to take out another loan. In some cases, they’ll even offer a discount for repeat borrowers.

However, some short-term lenders do something called double-dipping, which is when a lender charges you interest on your old loan and your new loan at the same time. This is something you’ll want to avoid.

If you opt for a revolving line of credit, it’s even easier to get additional funds for future inventory purchases, since available funds are automatically replenished as you pay off the money you’ve borrowed. This makes lines of credit especially well-suited for buying inventory. However, some LOC lenders charge a prepayment penalty if you pay off the loan early, so that’s something else to watch out for.

Whenever you’re considering an inventory loan, you want to ensure that you understand the terms and costs involved, and also make sure the interest rate and any other fees charged are competitive. Some lenders are more transparent about their rates and loan terms than others. Generally, the more information the lender discloses on their website, the better.

You can use our short-term loan calculator to determine how much you’ll pay for your loan.

Inventory financing is a type of asset-based loan where the amount of financing you receive is directly related to the value of the inventory in question, usually 70 to 80% of the inventory’s value. As you sell the inventory you purchase with the loan proceeds, you’ll be able to repay the loan.

Inventory financing is typically used by large upstream producers and distributors of tangible goods, such as manufacturing companies and product wholesalers. You’ll need to both carry a lot of inventory and be purchasing a large quantity of inventory to qualify for this type of financing.

Inventory financing products are sometimes conflated with “inventory loans,” which is a more general term. An inventory loan is simply a loan to purchase inventory, whereas inventory financing refers to a specific type of loan wherein the inventory purchased with the loan is used to secure the loan. A standard business loan to purchase inventory may instead require another type of specific collateral, a personal guarantee, or a general blanket lien on all of your business assets.

Unlike inventory financing, which is appropriate for large B2B businesses, other types of inventory loans can be used by small B2C businesses.

Inventory loans are often structured as short-term loans, with the expectation that the inventory will sell quickly and pay for itself quickly. With a short-term loan, you receive the entire sum up front and then repay the principal, plus interest, in installments.

Usually, the minimum loan amounts for inventory term loans are on the high side, meaning the smallest loan you can take out could be $500,000 (or higher, depending on the lender). The amount you receive will be a percentage of the appraised value of the inventory you are purchasing, to account for the fact that inventory depreciates in value over time. For example, if you need to purchase inventory with a liquidation value of $800,000, the lender may lend you 80% of that, so you’ll receive a sum of $640,000.

A short-term loan can be a good choice for large, one-time inventory purchases — if you have the opportunity to purchase a bulk amount of quick-turnaround inventory at a discount, for example. However, some loans may be easy to renew for repeat borrowing needs.

A line of credit is a common loan structure for inventory loans and is more suitable for ongoing access to capital for inventory purchases. With an inventory-secured line of credit, the business owner receives a line of credit based on the value of their inventory, repays it as the inventory is sold, and borrows more funds as needed and the limit is replenished. The borrower only has to pay interest on the money they withdraw, plus any other associated fees.

Rather than one-time inventory purchases, an inventory line of credit can be useful for regular inventory replenishment needs due to cyclical cash flow issues, e.g., for a business that has slower sales at certain times of the year.

Note that before you turn to a small business lender for a line of credit, you may want to try to negotiate a line of credit with your vendors directly.

Accounts receivable and inventory financing (ARIF) is when accounts receivable financing and inventory financing are used in conjunction. Businesses that frequently have a lot of money tied up in both invoices and inventory may be able to leverage both of these assets as collateral to secure financing.

Accounts receivable financing — also known as invoice financing — is a loan based on the value of your business’s unpaid invoices. You’ll usually get a line of credit based on the value of your receivables (invoices). Because A/R financing and inventory financing are both asset-based loans, they function similarly and may be used together to secure a loan or line of credit.

As with inventory financing, with AR financing you’ll only receive 70-80% of the value of your unsold invoices; this is to account for the fact that some of those invoices may never be settled.

Invoice factoring is something slightly different, as you actually sell your unpaid invoices to a factoring company, but can also be used to leverage outstanding invoices to pay for inventory.

Purchase order financing can be a useful way for B2B companies to finance certain types of inventory purchases. With this type of financing, you receive an advance to buy the inventory you need to deliver on large purchase orders.

PO financing works well for companies that resell finished goods and need to fulfill orders for these goods. The way this works is you receive a purchase order from a reliable (creditworthy) customer. The PO financing company will then front you the capital to pay your suppliers for the inventory needed to fulfill that order.

PO financing is similar to invoice factoring, except with PO financing you’re taking out a loan to fulfill an order; invoice factoring is a loan based on completed orders.

Inventory financing is a type of business loan used to purchase inventory. Though sometimes the two terms are used interchangeably, technically, “inventory financing” is different from a standard “inventory loan” because with inventory financing you’re using the inventory you’re purchasing as collateral to secure the loan.

While all restaurants and retailers (and some other types of businesses) need to purchase inventory, there are a few main reasons you might need to take out a loan to buy inventory:

• You need inventory to start a new business
• You ran out/are running out of inventory quicker than you expected
• You need to prepare your business for the holiday season
• You need to restock but your funds are tied up elsewhere
• You have a time-sensitive opportunity to purchase a large amount of product at a discount
• You need to purchase inventory in bulk to qualify for bulk pricing

In addition to inventory financing, a type of accounts receivable financing, some other types of loans that can be used to purchase inventory include:

• Short-term loan
• Line of credit
• Merchant cash advance
• Invoice financing
• SBA loan

Inventory financing lenders tend to be online companies with relaxed borrower qualifications. Though most inventory loans require at least 6 months in business, it may be possible to find financing if your business is younger, especially if you’re able to use the inventory you’re purchasing as collateral on the loan.

Typically, you will need to repay an inventory financing loan quickly — within 3 months — and you will start repaying immediately after receiving the loan. However, with some inventory loan types, you may have as long as six months or even a year to repay the loan in full.

Equipment financing term lengths vary a lot and could be as long as several years.