Inventory financing advances money for stock and is paid down as that stock sells. The stock itself is pledged as collateral. A funding partner reviews sales history and the goods before setting terms.
At a glance
- Pays for
Stock ordered before customers buy it
- Secured by
The goods being financed
- Paid down
As the financed items sell
Inventory financing companies: what they may ask a Mandan, ND motorcycle shop about its riding gear
Companies that finance inventory may want to understand the goods before the business. A motorcycle shop in Mandan, ND carrying helmets, jackets, gloves and boots can answer most of these with its own sales reports:
- Sell-through: how many weeks a size run of jackets takes to clear the rack
- Resale value: gear still in original packaging holds value better than opened returns
- Tracking: a stock list by item number, cost and date received
- Concentration: how much of the order is one brand or one product line
A funding partner may also ask for recent business bank statements and the supplier invoice for the order. Each partner sets its own advance, rate and term after that review, and some decline goods they cannot value. For other structures, see the business loan types side by side.
Inventory financing example: a Morton County, ND safety supply store's boot order
Illustration only, invented figures: a Morton County, ND safety supply store orders $24,683 of work boots ahead of a large customer's crew refit. The invented inventory line charges 12.38% a year on the balance still owed, and the store pays down one quarter of the order, $6,170.75, each month as pairs sell.
| Month | Balance at start | Interest that month | Paydown |
|---|---|---|---|
| Month 1 | $24,683.00 | $254.65 | $6,170.75 |
| Month 2 | $18,512.25 | $190.98 | $6,170.75 |
| Month 3 | $12,341.50 | $127.32 | $6,170.75 |
| Month 4 | $6,170.75 | $63.66 | $6,170.75 |
In this invented case the four months of interest come to $636.61. If half the boots sat unsold for an extra month, the invented interest would keep running on that half, which is why sell-through matters as much as the rate.
What is inventory financing? Bourbon and craft spirits at a Mandan, ND tavern
Inventory financing is credit tied to goods held for sale. For a tavern, the goods are bottles on the back bar and cases of bourbon and other spirits in the storeroom. The financing covers a larger distributor order than one week's deposits would, and the balance falls as the bottles are poured and sold.
County Business Patterns counted 50 wholesale trade employer establishments in Morton County, ND in 2023, and 42.0% of them had fewer than five employees. In the same count, food services and drinking places numbered 65 employer establishments in the county, 25 of them with fewer than five employees (38.5%, NAICS 722).
Kegerators, towers and coolers are equipment rather than stock; they belong on the equipment financing page.
Purchase order financing example: 600 printed hi-vis vests from a Mandan, ND print shop
With purchase order financing, the funder settles the supplier's bill for goods a customer has committed to buy. When the customer pays its invoice, the funder takes back what it advanced plus its fee, and the business keeps the rest.
Illustration only, invented figures: a Mandan, ND print shop wins an order for 600 printed hi-vis vests from a contractor. In this invented case the blank vests and printing supplies cost $15,926, and the shop invoices the contractor $22,140. The invented funder charges 3.17% for each 30 days its money is out. The contractor pays on day 52, so two invented periods apply and the fee is $1,009.71. The shop keeps $5,204.29 in this invented case.
This only works when the customer can be checked and the order is confirmed in writing. A funder may turn down an order from a customer it cannot review, however strong the shop's own sales are.
How does inventory financing work? A Mandan, ND fabric and quilting shop's order paid down in three steps
- The shop sends the supplier invoice for the order.
- The shop records sales against the financed order, so the balance owed stays tied to goods still on hand.
- Paydowns fall on the dates the agreement sets, such as once a month, out of the money those sales bring in.
Illustration only, invented figures: a Mandan, ND fabric and quilting shop draws $12,354 for a supplier order at an 11.06% annual rate. It pays down $4,100 after 30 days and $4,600 after 60, and clears the last $3,654 at day 90. Simple daily interest comes to $112.30, $75.03 and $33.22 for the three 30-day stretches, $220.55 in this invented case; a slower last paydown would keep the interest running on that $3,654.
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