Updated June 9, 2026. Originally published May 19, 2021.
Quick answer
Inventory financing is funding that product businesses use to buy inventory they’ll sell later, with the inventory itself serving as collateral. It usually takes the form of a short-term loan or line of credit, and it lets growing brands order enough stock to meet demand without draining their cash. Costs and qualification vary by provider.
In running a growing business, one of the most common issues businesses face is inconsistent or poor cash flow. Simply put, cash flow is the amount of cash (or cash equivalent) moving in and out of a business during a time period. There is a difference between cash flow challenges and a recurring negative balance, which often points to a more substantial business issue.
Cash flow challenges can be caused by seasonality, when your business or products sell heavily during one season. For many consumer packaged goods (CPG) companies, they can also occur when making inventory purchases that leave bank accounts thinner until cash from new inventory is realized. To avoid this cash pinch when ordering inventory, many companies shrink their order size. Yes, this avoids the cash flow pinch, but what does it do to a company’s growth when they know they could sell more than they’re ordering?
Understanding that this dilemma strikes at the ability of young companies to grow, there are steps companies in high-growth mode can take to seize growth opportunities without abandoning financial health. For CPG brands whose largest cost is inventory, inventory financing can resolve the cash flow dilemma without sacrificing either growth or company finances.
What is inventory financing?
Inventory financing is a funding option tailored to product businesses to acquire inventory for later sale. The funded products serve as collateral against the funding. This model often lets smaller or younger companies access the larger financing that traditional lenders reserve for enterprise clients, and it’s a strong option for quickly growing companies with increasingly larger and more frequent manufacturing runs.
How does inventory financing work?
Inventory financing comes in the form of a short-term loan or a line of credit that businesses use to purchase inventory. Lenders will often consider the type of inventory and your sales data to set the specifics of the loan.
Who can use inventory financing?
Inventory financing is a popular option for retail stores, wholesalers, distributors, and manufacturing companies. To secure an inventory loan, a business must often meet the following criteria:
- Be at least one year in business or meet a revenue threshold
- Be a product-based business with a reliable inventory management system
- Be able to provide detailed and accurate financial statements
- Be able to certify that the business is profitable
- Be able to provide credit history and scores
What documents are required for inventory financing?
After gauging whether inventory financing would work for your business, the next step is to prepare the documents required to apply. Keep in mind that requirements may vary from one provider to another.
- Business plan
- Personal and business credit history and scores
- Personal and business tax returns
- Relevant personal and business financial documents (balance sheet, profit and loss statement, sales forecast, and cash flow statements, among others)
- Inventory list and estimated value
- The appraised value of the inventory
How to prepare for an inventory loan
Applying for an inventory loan can be simpler and quicker than other types of traditional loans. However, that does not mean it’s easier to acquire. If you think inventory financing is right for your business, here is a step-by-step guide to help you prepare your application.
Step 1: Compile relevant financial documents
When reviewing a loan application, financial institutions need an overview of your business operations to decide whether you will be able to pay back a loan. Some of the standard documents you would need are personal and business bank statements, tax returns, credit history and scores, and a list reporting the estimated value of your inventory.
Step 2: Prove efficient inventory management
You should have a well-organized inventory management system in place when applying for an inventory business loan. Proper inventory management makes it easier for your lender to get an overview of your inventory. It also gives your lender an idea of your inventory’s turnover rate, how much profit you are expecting, and the products you are unable to sell.
Step 3: Establish your credibility
Inventory financing typically requires a more thorough due diligence process than other business loans, because lenders need to make sure your inventory is a valuable asset. During the assessment period, a third party will be tasked to appraise your inventory and audit your inventory management system. The initial costs of this process vary based on the products in your inventory and the size of your facility.
Step 4: Review loan offers and wait for final approval
Once your application is complete, the lender will provide a loan offer specifying the loan’s amount, interest rates, and payment terms. After reviewing and signing an offer, you then wait on confirmation from the lender.
What are the benefits and drawbacks of inventory financing?
As with any important business decision, a business owner should weigh the potential benefits and drawbacks of inventory financing side by side. Here’s a quick look at both.
| Benefits | Drawbacks |
|---|---|
| Resolves a business’s cash flow challenges | Potentially more setup costs because of a thorough due diligence process |
| Increases potential for higher profit | Can be difficult to qualify for |
| Expands product lines | Higher funding minimums |
| Helps you get ahead of potential inventory issues | Requires POs |
What costs are associated with inventory financing?
Like other forms of funding, inventory loans come with fees. Remember, these are some of the fees you may find, and not all lenders charge each or any of them.
- Appraisal fees — also known as an inspection fee, this is a payment for an independent appraiser tasked with assessing the value of your inventory.
- Prepayment penalty — a fee charged by a financial institution if you pay your loan early.
- Origination fees — an upfront fee charged by a lender to process a loan application.
- Late fees — a charge that borrowers pay when they fail to make a payment on time.
Is inventory financing right for my business?
As the business owner, you know best. If any of the cash flow challenges or seasonality mentioned above affect your business, inventory funding may be worth exploring. It is important to understand that, due to the nature of inventory loans, if you become unable to pay your loan, your inventory may be seized by your lender.
What inventory type makes good collateral?
There’s no single inventory type that makes better collateral than others. Ultimately, it’s the lender that establishes the value of your inventory to determine the funding amount based on its appraised value.
How does Kickfurther compare to traditional inventory financing?
Traditional inventory financing and Kickfurther both help product businesses buy the inventory they need to grow, but they work differently. Here’s how they compare.
| Traditional inventory financing | Kickfurther | |
|---|---|---|
| Typical qualification | Often one or more years in business, proven profitability, strong personal and business credit, and detailed financials | Physical product businesses with at least $200K in annual revenue and POs from large retailers |
| How you repay | Fixed payments on a short-term loan or line of credit, often beginning right away | A custom payment timeline based on your expected sales cycles |
| Cost structure | Interest, plus possible appraisal, origination, prepayment, and late fees | A fixed cost of capital; volume-ordering discounts can help cover funding costs |
| Funding range | Varies by lender, often with higher minimums | Up to $2M+ in inventory |
| Best for | Established product businesses that can meet bank-style underwriting | Growing product brands that want payments matched to sales cycles |
As a small business, you have a variety of options when it comes to financing. Whether you need an inventory financing loan or another form of business funding, there are a number of tools available to help you get the capital you need. If you sell a physical product with a minimum annual revenue of $ 200,000, Kickfurther may be able to combine the best aspects of inventory financing with the flexibility of modern alternative financing.
