Inventory financing

Inventory finance can take the pain out of stocking up and protect your working capital. Buy now. Let future sales cover the cost.

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90% of SMEs face a cash crunch at least once a year – and paying for inventory that takes too long to sell  is a prime cause of this liquidity issue. Put simply, buying inventory now, then waiting months to get your cash back is a financial back hole that too many UK small and medium-sized businesses fall into. But it doesn’t have to be like that. Read on to find out more.

What is inventory finance?

Inventory finance, (also known as warehouse finance) is the term for a short-term business loan or revolving line of credit that is used to buy inventory – finished goods, components, raw materials – which are typically warehoused by the buyer before selling them to their customers. The purchased goods and materials act as security for the lending. 

Inventory finance is an important tool to support cash flow, as it can iron out the imbalance in income and expenditure caused by paying for goods or materials before their costs can be recouped from customers. Inventory finance may also enable growth, as it can allow businesses to hold more stock and attract more sales, than if they had to pay for stock upfront with cash. 

Businesses choose inventory financing to:

  • Cover short-term cash shortages
  • Prepare and stockpile inventory for the busy season
  • Buy in bulk to secure bigger discounts
  • Expand product lines
  • Keep up with customer demand and increase sales
  • Unlock capital tied up in inventory 

How does inventory financing work?

Inventory financing is a form of asset-based lending. The inventory is the asset that provides security for a loan. Wholesalers, retailers and manufacturers who must hold quantities of stock to support operations often turn to inventory financing to protect their working capital and expand their sales.

An example of inventory financing:

A retail car parts business sells tyres for many types of vehicle. This necessitates holding a large inventory of different tyres. However, many of these products are specialist tyres that have a slow sales turnover, but the retailer must have them available at all times to prevent the loss of business to competitors. Paying for these slow-selling products, then waiting to sell them to customers, is financially challenging, so the retailer takes out a £20,000 short-term loan – inventory financing – to buy stock instead of using cash. £20,000 is 80% of the lender’s estimate of the £25,000 liquidation value of the tyres, and the goods act as collateral for the loan. (The liquidation value – LV – is what the lender expects to sell the tyres for in a distressed sale to recover their money if the retailer defaults. The LV is always less than the full wholesale or retail value of the goods).

The retailer repays the £20,000 loan over 6 months in equal monthly instalments, plus interest. During this period they sell the tyres to customers. By the time the loan is fully repaid, all of the tyres have been sold and the retailer’s cashflow has been protected. 

The numbers:

Estimated liquidation value of the goods: £25,000

Loan at 80% of value: £20,000

Repayment over 6 months: £3,333 per month plus interest

Loan balance at 6 months: £0

Types of inventory finance

There are two main types of inventory finance: Short-term loan, and Revolving Line of Credit.

  • Short-term loan

What is says on the tin – a fixed loan that is repaid over a short period of time – typically less than 12 months. Short-term loans are paid back in fixed monthly payments over an agreed period. Interest and fees are added to the loan balance, with the rate largely determined by the distress-sale value of the goods. (Not all inventory is equal. Some will sell faster than others. The harder it will be for the lender to sell the goods if the retailer defaults, the higher the interest rate they will usually charge).

  • Revolving credit line

Unlike a short-term loan which must be arranged every time the borrower needs extra funds to buy stock, a  line of credit is a permanent credit facility that can be drawn against as needed. Think of it as a giant credit card account, with an agreed credit limit and interest only charged on the portion of the credit line that is used. As the line of credit is “revolving,” once the outstanding balance is paid off the credit limit returns to the initial approved amount. As with short-term loans, the inventory acts as security for the borrowing. However, the interest charged on a line of credit is not largely determined by the risk-value of the goods being financed, it is more likely to be determined by the risk of the borrower.

Advantages and disadvantages of inventory financing

As with all types of borrowing, there are pros and cons with inventory financing:


  • The purchased inventory acts as collateral for the loan. There’s no need to provide other business or personal assets to secure the funds
  • Funding is usually fast once the loan is approved
  • Weak personal credit is less of an obstacle to funding
  • Newer businesses are eligible, as borrowers typically only need six months to one year of trading to qualify
  • Can be used to buy almost any type of inventory

  • Lenders rarely provide the full amount needed to purchase the inventory
  • Inventory financing often requires more due diligence than other business loans to determine the inventory’s liquidation value. This may be time-consuming and costly to the borrower
  • Some lenders may only provide a minimum amount of financing – such as £250,000. This may be more than some borrowers need or can afford
  • Interest rates are typically higher compared to other small business financing options
  • The lender may require regular check-ins (typically from a third-party auditor) to monitor inventory levels and sales

Alternative inventory financing

If a short-term business loan or a revolving credit line are not for you, there are other ways to borrow funds to buy inventory:

For UK SMEs who take payment by credit or debit card from their customers. Borrow against the value of your card turnover. The higher it is, the more you can borrow. Repayment is taken from your card receipts at source, so you cannot default. No added security required.

Stop waiting 30, 60, 90 days or more for your customers to pay your invoices. Borrow against your billable sales and receive up to 95% of your invoice value within a day or two of raising the invoice. You can retain control of your sales ledger and the customer need never know you are using your invoices as collateral for a loan. No added security required.

An equity-free capital investment that helps online businesses quickly access capital in exchange for a slice of future sales. This is a revenue-based funding solution that keeps pace as you grow. No added security required.

How to repay your inventory finance

Depending on the type of inventory finance you choose, you can repay the funds in either of two ways:

  • If using a short-term loan, you will repay the funds in fixed instalments, plus interest, over an agreed period – typically 6 to 12 months. This option is best for businesses who prefer the regularity of a fixed repayment plan. 

  • If you are using a revolving credit line to buy inventory, you will be required to make a minimum payment each month, then clear off the whole loan within a set period – once again, typically 6 to 12 months. This option may work better for businesses with erratic income and who prefer to repay as they go, without the rigidity of a fixed instalment plan.

Where to find the right inventory finance for your business

Inventory financing is a specialist financial area, with every lender having their own criteria and differing rules of application. UK SMEs seeking this type of funding may find themselves forever searching and making applications to lender after lender. The delays this can create could cause you to lose revenues or leave your business vulnerable to a damaging cashflow crunch.

Instead, working with a broker, who can access inventory finance from a wide range of lenders is a better way to go. No more cold calls and endless demands for information, simply tell us what you need and leave the rest to us. 

Get started with Swoop

Buy more, sell more, boost business growth without putting strain on cashflow. Register with Swoop to discover the best rates, the best terms, and the biggest choice of inventory finance lenders.


Written by

Chris Godfrey

Chris is a freelance copywriter and content creator. He has been active in the marketing, advertising, and publishing industries for more than twenty-five years. Writing for Barclays Bank, Metro Bank, Wells Fargo, ABN Amro, Quidco, Legal and General, Inshur Zego, AIG, Met Life, State Farm, Direct Line, insurers and pension funds, his words have appeared online and in print to inform, entertain and explain the complex world of consumer and business finance and insurance.

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