Small Business Loans For Inventory Financing (Even With Bad Credit)
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Did you know there are business loans you can use to finance inventory? This can be a lifesaver for many different types of small businesses. Even those with bad credit.

Without inventory, you have nothing to sell. Or no materials to make your products. That’s a serious problem. But inventory costs money. And until you sell it, your small business may have a very large sum tied up. That’s not necessarily a problem if your products move quickly. But inventory that remains unsold is not only taking up space, it’s holding your cash hostage. You could be using that money for something else.

Especially for small businesses, cash is always an issue. Getting a loan to finance inventory can help your company run more smoothly. It can also open the door to new opportunities to grow your business.

What is Inventory Financing? 

There are two ways to interpret “inventory financing.” You can:

  • Borrow money to purchase new inventory
  • Use existing inventory as collateral to obtain business funding for another purpose

Either way, the inventory may serve as collateral, depending on the type of business loan you get. Inventory is a business asset. Therefore inventory financing is a form of asset-based lending. At United Capital Source (UCS), we offer both secured and unsecured types of small business loans.

Investopedia says, “Inventory financing is especially useful for businesses that must pay their suppliers in a shorter period of time than it takes them to sell their inventory to customers.” It is also an excellent option if your small business has been turned down for a bank loan.

Types of Small Business Loans to Finance Inventory

  1. Business line of credit

A revolving line of credit is similar to a credit card. There is a cap on how much you can borrow. You can take and use as much money as you need at any time, up to that limit. As you pay down what you’ve borrowed, the pool of available cash gets bigger again. Unlike using your business credit cards, a business line of credit has a much more favorable interest rate.

  1. Short-term business loans

You can borrow money to tide you over for a few months. Use it to re-stock inventory. Use it for general operations during a lean period. Or use it for new investment. Your loan may be unsecured or secured with existing inventory or some other business assets.

  1. Accounts receivable financing, or factoring

This is a good alternative to smooth ongoing fluctuations in cash flow. It makes your business more stable and predictable. With this type of loan, you are selling your receivables to someone else at a discount. You get the cash now, they take over collections. Merchant cash advance is similar. It is based only on credit and debit card receivables.

There is a downside to using inventory as collateral. You’re putting it at risk. If you can’t repay your loan, your lender can take that inventory. They will then sell it themselves to recoup their money.

Priyanka Prakash at FitSmallBusiness notes that with a bank loan, “the bank may also place a blanket lien on your business assets, which allows them to go after any business asset if you can’t pay back the loan.” She warns that a blanket lien could also make it hard to get any new financing in the future.

Here at UCS, we know bank loans are difficult for small businesses to obtain. We offer a variety of other ways to finance your inventory. We work with each customer to identify the best match for your business.

Who is a Good Candidate?

  • Retail businesses depend on a steady flow of inventory to survive. But timing and the volume you need don’t always align with cash in hand. Inventory financing keeps your store well-stocked.
  • Seasonal businesses need a lot of inventory, but not consistently. Some small businesses carry certain categories of seasonal merchandise. Retailers in particular are vulnerable to seasonal ups and downs. You need to order heavily before peak seasons get here, but that may be when you’re most cash-poor.
  • Wholesale businesses require inventory, too. As your products move out to B2B or B2C customers, you need new inventory to create the next round of products.

Inventory financing is not appropriate for startups. That’s because lenders want to see some sort of track record – evidence that you are able to sell products. If you’ve been in business at least six months, UCS can help you.

Most service businesses are not eligible, either. You don’t have saleable inventory. On the other hand, some service businesses do have a retail component. Hair salons and day spas sell packaged products such as nail, hair and skin care products. If you use them on-site in your work, these items are considered supplies. But if you mark up the price and sell them at retail to customers, those items become sales inventory.

You may even generate a nice income from this inventory. That being said, it probably isn’t life-critical for your business. You buy limited amounts of this inventory. Chances are you’ll never have to worry about financing that purchase.

So you’re a good candidate to finance your inventory if:

  • The products sell quickly
  • Your business has a solid sales history
  • Your busy season is approaching

You’re not a good candidate if:

  • Your business has high debt
  • You want long-term financing
  • You want to purchase new products that have no verifiable sales history

Your type of inventory matters, too. Inventory can be raw materials, semi-finished or work-in-process, or finished goods. Different types of small businesses have different types of inventory. A hair salon or auto repair shop has lots of small items, most of which are not that expensive. An automobile dealership has a small number of very expensive items.

How easy is it to sell your inventory? Lenders look at the total value of your inventory and its liquidity. The more liquid it is, the more of its value you can borrow. That’s why bad credit isn’t a problem with this type of financing. Your credit score may not even be a factor. Inventory proven to sell shows you will have cash to repay. And if you don’t, your lender will be able to sell it.

Why Get a Small Business Loan to Finance Inventory?

You could wait until you have enough money saved up to purchase more inventory. But that isn’t practical. If it takes too long, you could run out of products to sell. “Out-of-stocks” are poisonous to your business. At the least, customers will be disappointed. Having to wait for their favorite shampoo or their car parts to come in will annoy them. They may walk away and take their business somewhere else.

So waiting isn’t a smart business strategy. Cash is what keeps your business flowing. Inventory financing gives your business an infusion of cash when you need it. These small business loans are often available with minimal paperwork and quick turnaround. For example, at UCS we can help you find small business funding from $2000 to $2,000,000. In our experience, small businesses rarely need more than $25,000. We have no application fees. You can get approval within 24 hours and get your funds within 72 hours.

That means money is readily available when you need it to:

  • Get through a temporary, unexpected cash crunch
  • Boost short-term working capital to support daily operations
  • Keep fast-selling merchandise in stock
  • Take advantage of vendor discounts for purchasing larger volume or paying up front
  • Take advantage of off-season discounts
  • Purchase enough inventory for peak sales. Small retailers sometimes find they didn’t buy enough of a product that turns out to be super-popular. But during busy seasons it can become impossible to reorder at the last minute. Sales are lost. Instead, the right business loan allows you to stock up well. Then you can use revenue earned during the busy period to repay. Having enough merchandise on hand enables your business to increase sales overall.
  • Take advantage of a time-sensitive new opportunity. For example, you just got word Costco is finally interested in your product. But they require lots of it, consistently. You need more inventory to ramp up production right now, or you’ll lose that amazing sale. Or flu season is just around the corner. Your medical practice needs to stock up on vaccine right now while supplies are available, so your patients don’t go unprotected.

Inventory financing is often available to small businesses turned down for traditional loans. That might be due to bad credit, not enough collateral other than inventory, or some other reason. You can use this type of financing in combination with other types of small business loans.

Sources of Funding to Finance Inventory

  • Not the SBA. You may think that if you get an SBA-backed business loan, you can use the money to finance your inventory. While that would be great, it’s not true. There are a lot of things you can do with 7(a) loan proceeds, but the SBA warns there are restrictions. “For example, proceeds can’t be used to buy an asset to hold for its potential increased value” — in other words, inventory items you plan to resell.
  • Traditional banks don’t particularly like inventory financing. If you don’t have a long enough or strong enough sales track record, they don’t like the risk. And banks prefer to loan at least $250K. Small business owners don’t usually need huge sums, but you do need flexibility. Money gives you the flexibility you need to make smart, timely business decisions.
  • Asset-based lenders are willing to work with businesses turned down by banks. They offer financing using existing inventory or other receivables as collateral. Your credit score isn’t important because they are focused on the value of your inventory and the quality of your inventory management system. Most asset-based lenders deal only in very large size loans.
  • Alternative (online) lenders also handle asset-based loans such as inventory financing. They offer more options, more flexible approval criteria and much faster funding. Here at UCS, we can help you find the money you need. We know most small businesses don’t fit traditional lending models. Our mission is to match your business with the specific funding solutions that will help your business grow.

Working to fit your business plan…

We work with each customer to fully understand your entire business operation. That’s because we’re not looking to “do deals” and move on. We’re not here to address only a single need in a vacuum. We want to explore the best options and place you in the program that is the best overall fit. We take the long view with each customer, building relationships where we can serve as your working partner.

Struggling to fit your lender’s repayment schedule hurts your business. So we structure payments to fit your ability. You can repay as you make credit card sales, or make daily, weekly, bi-weekly or monthly payments.

  • Vendors themselves may offer short-term inventory financing with a deposit. They may even be willing to finance 100% of value, with little or no interest. After all, they believe in the sales-worthiness of their products. And the only credit score they care about is your payment record with them.

Small businesses often fall through the cracks when it comes to traditional financing. You can be turned down because of low sales volume. Or because your cash flow is unpredictable or insufficient. Or because your credit score is less than stellar. Like other money management tools for small businesses, loans that finance inventory help you improve cash flow. Used strategically this type of loan can help improve your bad credit, too.

During the early years of recovery from the Great Recession of 2008, many small businesses couldn’t get inventory financing. Lenders didn’t see existing inventory as viable collateral, because nothing was selling. Today, alternative lenders offer many options to help small businesses like yours.

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