Inventory Finance

Every business needs inventory. Whether it’s the ingredients to prepare meals at a local cafe, merchandise for an e-commerce store or equipment parts at an MOT garage, without inventory, you may not have a business.

However, one issue that many UK SMEs have is a lack of access to the funds needed to invest in this inventory. It’s a vicious cycle; without inventory, you can’t make money, but without money, you can’t buy your inventory.

Inventory financing, also known as stock financing, is a short-term funding solution that enables businesses to purchase inventory. By securing funding against existing or future inventory, businesses can bridge cash flow gaps, take advantage of supplier discounts or prepare for peak seasons.

At 365 Finance, we’ve helped thousands of UK-based SMEs stay on the path to success without overextending their finances. While we don’t offer traditional inventory financing, our revenue-based finance options help businesses gain fast access to capital with repayments that work for their business.

Inventory finance involves a lender providing funds to a business secured against unsold stock. 

What this means is that the business gets the cash it needs to purchase inventory upfront, while the lender uses the value of the inventory as collateral until the advance has been repaid.

There are two main ways that this type of financing solution works:

1. Inventory loan: A lump sum loan provided for a specific inventory purchase, repayable over a fixed term.
2. Revolving inventory line of credit: A more flexible credit agreement where businesses can draw funds as and when they need to, up to a limit which is negotiated at the start of the agreement.

Normally, these loans are provided by banks, specialist finance providers or alternative lenders.

Let’s go into more detail on the two main types of stock finance solutions. Depending on how frequently you need to purchase stock and how seasonal your business is, several factors help you decide which one is most appropriate for your business needs.

Inventory Loan

This is a fixed-term loan which a business will take with the specific purpose of purchasing inventory. It works well for businesses experiencing short-term cash flow issues, freeing up cash for other areas of the business or preparing for peak season.

Pros:

1. Predictable repayments
2. Can use it to make use of supplier discounts
3. Suitable for one-off inventory investments

Cons:

1. Not always the most flexible loan
2. Traditional lenders will require in-depth information before approving loans

Revolving Inventory Line of Credit

If a business takes out a revolving inventory line of credit, they are allowed to borrow multiple times from a specific supplier, up to a pre-approved limit. As the business sells the inventory and repays the credit, the funds will become available again.

Pros:

1. Flexible access to capital
2. Matches irregular sales cycles
3. Only pay interest on drawn-down funds

Cons:

1. May involve higher interest rates than term loans
2. Regular stock reporting may be required

Many SMEs in the UK rely on the different forms of inventory financing to see their businesses through critical periods. Here are just some of the most common use cases we see in our customers:

• Preparing for peak seasons: Many retailers will often increase inventory during sales spikes, like Christmas, Black Friday or summer sales.
• Economies of scale: Businesses can secure better pricing from suppliers when buying in large quantities, but may need some extra cash to afford these orders.
• New product launches: When bringing a new product to market, brands may invest in a larger first run of new stock so they have plenty for customers on launch day.
• Supply chain delays: You can’t always guarantee a consistent flow of stock throughout the year, so many SMEs prefer to place large orders less frequently for peace of mind.
• Smooth cash flow: If you’re constantly waiting on customer payments, business owners can use inventory finance to bridge any gaps and keep stock levels where they need to be.

Seeking inventory finance can be a beneficial way for SMEs to keep afloat. Here are just some of the key advantages of this type of financing:

• It can help small businesses improve their cash flow by helping them maintain healthy working capital while still having the ability to invest in new inventory
• It keeps businesses growing by allowing them to scale up operations quickly during their peak seasons
• Unlike other methods of funding, you don’t have to give up any ownership of your company to gain access to external funds

Although inventory finance is great for some businesses, it doesn’t necessarily mean it’s suitable for yours. Here are some examples of disadvantages that you should be aware of:

• Inventory can depreciate in value over time, so you run the risk of losing money on any unsold stock
• Traditional lenders may ask you to include physical stock as collateral, which they can take should you be unable to pay back your advance
• Some lenders also require ongoing stock audits and other reporting obligations until the advance is repaid

Accessing external finance is a big thing for small businesses, so it’s important to choose the type of financing that works for you and your business.

In our experience, inventory finance is most suitable for product-based businesses that rely on consistent stock turnover to generate revenue. This can include:

• Retail stores with seasonal sales cycles
• Wholesalers placing large orders
• Product businesses with strong but irregular cash flow

If any of the above applies to your business, inventory finance – or alternatives like revenue-based finance – can help you operate more smoothly and set you on the path to growth.

The application process for inventory finance can vary depending on the lender you are going to but as a minimum, you’ll probably be asked to provide the following information:

• Trading history (typically between 6-12 months’ worth)
• Financial statements
• Inventory records including valuation, turnover and supplier invoices
• A business plan to explain how the inventory will be used and sold

This process can be tedious and slow at times, which is why many small businesses are turning to alternative solutions. Our revenue-based finance solutions are a good example of cash advances that are simple and easy to apply for when you need to purchase inventory.

If you need some more help to get an idea of how much you can apply for, try out our calculator below to understand the key metrics we look for.

If inventory financing doesn’t suit your business model, there are several other options to consider:

• Trade Credit
• Equipment Finance
• Invoice Finance
• Merchant Cash Advances
• Business Loans
• Bank Overdrafts

Each of the options has its own set of pros and cons, but it might be worth taking a good look at everything that’s available before making a decision. You can explore these options in detail through our other financing guides.