In retail, inventory is the lifeblood of your business. But even thriving businesses can find themselves struggling to pay for new inventory. 

If your business is in this position, there’s always the option of taking out an inventory loan.

We’ve created this in-depth guide to help you understand the ins and outs of inventory loans, including who they are for, and how to apply for one.

What is an inventory loan?

An inventory loan is a short-term business loan that retail business owners use to purchase products to sell.

Similarly to regular business loans, an inventory loan is for a set amount paid back in monthly payments over a fixed period or in one lump sum after the sale of the inventory. 

Unlike other business loans, inventory loans don’t require you to offer a house, car, or equipment as collateral. Instead, the merchandise you plan to purchase secures the loan.

Why get an inventory loan?

Inventory loans have one purpose: to help you buy inventory for your business.

Basically, if you need inventory but don’t have enough capital to pay for it, then you’d get an inventory loan to help you pay for the stock.

This form of inventory funding can be a lifeline to otherwise successful businesses that have run into a cash flow crunch and need additional cash on hand to help buy inventory.

When small businesses can turn to inventory loans

  • They need cover for short-term cash shortages
  • They need to prepare and stockpile inventory for busy seasons like Black Friday and Christmas
  • They want to expand product lines
  • They need to unlock capital tied up in inventory
  • They need to secure upfront cash to keep up with customer demand

But before applying for an inventory loan, make sure you can sell all the stock you plan to buy. While it’s a great form of financing, if you don’t have a high degree of confidence in your ability to sell the stock, you’ll struggle to make repayments.

Which businesses benefit from inventory loans?

Since inventory business loans are based on physical products, only product-based businesses benefit from inventory loans, not service businesses (which have no physical stock).

Inventory loans are generally most beneficial to small businesses. Larger, more established companies tend to have an easier time getting access to lines of credit.

So, if your small business has strong sales, then perhaps an inventory loan is a good option for your business.

Eligibility for inventory business loans

Different banks or online lending platforms may require additional terms for businesses to be eligible for an inventory loan.

In general, though, your business should meet the following requirements to qualify for an inventory loan:

In business for at least a year

Your business needs to have been up and running for at least a year. The longer you’ve been in business, the more comprehensive sales history you have, and the higher your chances of approval will be. Unfortunately, it’s pretty rare for a brand new business to be approved for an inventory loan.

Sales history

Before getting a loan, you must prove that your business is profitable and can repay the loan. Lenders will determine your eligibility based on your business’s previous financial and inventory records, so make sure you’ve got a detailed sales history report ready. The report should include everything from inventory turnover, profits, and sales projections.

Can provide a detailed inventory system

Many lenders are very particular about inventory control and product movement. They want to know where the product is sitting and where it’s going. You’ll need to provide them with regular reports on shipping and returns on products, accounts receivable or sale order receipts.

No major credit violation

Lenders will likely run a credit check against your business, ensuring no major credit violation such as bankruptcy, repossession, tax lien, or others by the company in the recent past.

The advantages of inventory loans

No need for personal collateral

You don’t have to put up your home, car, and other assets under your name as collateral. So, in the worst-case scenario where you don’t sell all of your stock, you won’t lose your house. You’ll just have to give up the inventory that you bought with the loan.

Fast process

Considering that you are eligible and have all of your documents in order, getting an inventory business loan is quicker than other conventional loans.

Meet customer demand

Inventory loans help you ensure that your shelves are packed with the product during peak seasons—meaning more sales!

Improved cash flow

You can free up cash otherwise tied up in inventory. 

No personal credit score required

No need to worry about your personal credit score—or lack thereof—when applying for an inventory loan.

The disadvantages of inventory loans

It’s tough to get approval

It can take a while for lenders to assess your application. Lenders are more likely to approve an inventory loan for product lines that have high potential.

The interest rates are higher

Since lenders feel they need the extra security as there is no personal guarantee or collateral involved (other than the inventory), inventory business loans typically come with higher interest rates.

Regular check-ins

Your lender may require frequent check-ins to monitor inventory levels and sales.

May not get the total required 

You’ll probably need to turn to other sources of funding alongside inventory loans to meaningfully grow your business... That’s because you can only use inventory loans to buy inventory!

How inventory loans work

Inventory loans are a form of asset financing. Retailers or other product-based small businesses turn to lenders for a cash injection needed to purchase inventory.

This type of financing is usually used by small businesses that lack the available assets to secure other financing options larger corporations can access. They also can’t raise money by issuing bonds or new rounds of stock. 

Instead, they use all or part of their existing stock or new stock as collateral for the loan.

When you might need an inventory loan

Inventory loans are there for retailers that don't have enough capital to cover the stock they need. This could be due to a number of reasons.

For example, they may have found a discount deal on a bulk purchase that costs more than they currently have. Or to bring in more inventory ahead of peak trading periods, such as Black Friday, where retailers typically sell more products than usual.

Or maybe they’re just growing really quickly!

If a retailer doesn’t think that they’ll sell the total amount of stock before the stock’s invoice is due, they can also apply for an inventory loan.

How to apply for an inventory loan

Step 1: Determine the amount and type of inventory needed

The first step to applying for an inventory loan is deciding how much money you will need and what you’re going to spend it on. 

To determine your inventory needs, take a close look at patterns in sales volume, seasonality, and consider economic factors that may affect customer activity.

Overestimating your needs can leave you with hefty payments and unsold inventory—while underestimating can leave you scrambling for more stock or running back to the lender for additional financing.

It’s also a good idea to apply for a loan for inventory that you already have a track record of selling, as lenders will be more willing to give you the loan. 

Step 2: Get your financial records ready

Before applying for an inventory loan, ensure that you get all required documentation ready. This documentation should give the lender a comprehensive overview of your company’s financial standing.

The financial documents that you’ll need to prepare include:

  • Balance sheets
  • Profit and loss statements
  • Business bank statements
  • Inventory list
  • Inventory management records
  • Sales forecast
  • Business tax returns

Step 3: Complete the application

Once you’ve got all of your financial documentation ready, you can complete the application form and submit it with your documents. The form will generally include basic information like name, business name, and the amount you are requesting to loan.

If the lender determines that you are eligible for the inventory loan, you will then go into the ‘Due Diligence Period’. Due diligence is the investigation of your business.

Step 4: Go through the due diligence process

Since due diligence is a lengthy process, many lenders will ask you to sign a loan agreement. This agreement reduces the risk that you decide not to follow through with the loan even after performing due diligence. 

They want to know that they’re not wasting their time putting in the hard work of due diligence, all for you to change your mind and cancel the application.

During the due diligence process, you may also need to submit a field audit of your business. A lender representative will visit your office space, warehouse, facility, or wherever you store your inventory. They want to examine the conditions in which you store your inventory (to ensure that it’s safe) and to examine your existing stock.

Step 5: Review offer and wait for final approval

Once you’ve gone through the initial review of your application and passed due diligence, the lender will present you with a preliminary offer. The offer will include the details of the loan, including interest rates and terms.

Note that this is non-binding and not the final offer. Once your application is complete, you’ll have to wait for the final decision. However, by then you should already have a good sense of whether you’ll be approved or not.

Step 6: Final paperwork and receive funding

Finally, you’ll get to a point where you just have to sign the final paperwork, including the official contract detailing the loan, rate, and terms.

Once that’s all done, you’ll receive the funding. It’ll typically come through in a few days.

Boost your inventory and open up your cash flow

Ecommerce businesses and retailers are the best use case for inventory loans. They benefit from the extra cash needed to buy inventory at the most pressing times: whether it’s leading up to peak seasons, to secure a discount deal on bulk stock, or to help get you through a tough patch.

At Uncapped, we offer investment capital with offers ranging from £10k to £5m through a revenue share agreement similar to a merchant cash advance. See if you qualify