Inventory Loans for Small Businesses
Learn about the funding options used to pay for inventory.
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Financing for inventory purchases.
Keeping your shelves stocked with the merchandise your customers want is an important part of running a successful business. But urgent inventory needs and significant inventory discounts can come when you’re not ready for them. In such case, an inventory loan might be a smart move.
Inventory loans can help you manage inventory purchases during cash flow crunches. They can prepare you for a surge in customer demand during busy season. And in some situations, inventory financing can even help you save by financing bulk purchases at a reduced price. You will just want to make sure that the cost of financing doesn’t outweigh the profits on the value of the inventory.
Inventory financing options from OnDeck.
OnDeck Line of Credit
A revolving credit line you can draw from 24/7 to receive funds within seconds.*
- Credit limits from $6K - $100K
- Flexible repayment terms of 12, 18 or 24 months
- Great for unexpected discounts on inventory
OnDeck Term Loan
A one-time lump sum of cash with an eventual option to apply for more.
- Loan amounts from $5K - $250K
- Repayment terms up to 24 months
- Great for short-term inventory financing
What types of business funding can be used for inventory purchases?
There are a number of different business loan options and funding types available to cover the purchase of inventory. Those may include the following:
Business term loan
With a business term loan, you can receive a lump sum of money up front and repay it (along with interest and sometimes fees) in monthly payments over a repayment schedule of months or even years. These are one of the most common types of business funding and may also be referred to generically as “small business loans.” When used to cover inventory purchases, short-term business loans usually are a better option than bigger loans with longer repayment periods.
Many vendors offer payment terms to their customers that allow them to purchase inventory and pay for it over one or two months. This is often one of the first sources of credit available to new businesses, and gives those business owners the opportunity to build a strong foundation for their business credit history.
Business credit card
Business credit cards are usually a business owner’s first foray into business credit. They work very similarly to personal credit cards, but serve the important purpose of separating a business owner’s personal finances from the business. While they can provide capital for initial inventory purchases, businesses generally use them to build credit history. Then they are able to secure more favorable types of inventory financing.
Business line of credit
A business line of credit refers to an unsecured form of credit in which a business receives an approved amount of money (the credit limit) which can be drawn to their bank account and used as cash. As the funds are repaid, the money becomes available to use again without reapplying. That makes lines of credit a good fit for taking advantage of inventory discounts when they arise. They can also be good for seasonal businesses that experience ebbs and flows, as well as for covering everyday business expenses.
Inventory line of credit
An inventory line of credit is a more specific type of business funding that is secured by the inventory it is used to purchase. That means if the business defaults on their payments, the lender can seize the inventory to make up for what it’s lost.
Merchant cash advance
Merchant cash advances are a unique form of business funding in which the cash advance provider purchases a portion of business’s future credit card receivables. They then collect repayment by taking a percentage of the business’s daily credit card sales. Therefore this funding may make sense for restaurants and retailers. That is, businesses where the types of inventory are often purchased by the end consumer with credit cards.
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Learn more about inventory loans.
How inventory financing works depends on the type of loan used to cover what the business needs. But there are similarities between the types of business funding that are most commonly used. To start, when you complete a loan application for inventory financing, all business lenders will do some type of credit check. They’ll also request other information such as your annual revenue and bank statements. Your personal credit score is usually reviewed in addition to the business’s credit.
The financing company will then determine the business’s eligibility for its products (and for how much money) based on its creditworthiness. Depending on the lender, a personal guarantee may be requested. That would mean the business owner is liable to repay the loan with their own personal assets in the event that their business assets were depleted.
You should weigh a number of factors when you consider a small business loan for buying inventory. Does it make financial sense? Or will the total amount of interest you pay consume all of the profit from the merchandise you intend to sell?
The loan terms that make the most sense for your business will be determined by the frequency of your inventory turnover. For example, if you expect your inventory to turn in three or four months, it might not make sense to borrow money with loan terms of multiple years. Longer-term loans might make it harder to maintain cash flow for future inventory if your working capital is tied up by loan repayments for too long. A short-term inventory financing loan might be more appropriate.
Keep in mind that a longer-term loan will typically have a lower annualized interest rate and lower monthly payments, but the downside is that the total cost of the loan will likely be higher. Conversely, a short-term loan may have a higher annualized interest rate and larger payment amounts, but the total cost of the borrowed funds will likely be less.
Another type of financing many small business owners use to cover inventory purchases is a business line of credit. With a line of credit, the borrower receives an available amount of credit (the credit limit) to draw funds from as needed. As the funds are repaid, the amount of available credit is replenished and can be drawn from again — without the need to reapply.
Because of the replenishing nature of the financing, this is also known as a revolving line of credit. With this type of funding, interest is only charged on the credit the business owner uses. Therefore a line of credit can be especially useful to keep on hand for opportunities to purchase inventory at a discount — particularly when you need to act fast.
Online lenders. Online lenders like OnDeck provide multiple options that can be used to pay for inventory purchases. The speed and convenience offered by online lenders is considered to be a great advantage over working with a traditional bank. Online lenders are also often able to provide funding to businesses that banks would not.
Banks. A traditional bank is a common place business owners go for small business financing. If you have a well-established relationship with your bank as well as strong financial records, bank loans generally come with more favorable interest rates. That said, many small businesses struggle with receiving approval from banks, and the application process alone is known to require a lot of time and effort.
U.S. Small Business Administration. The U.S. Small Business Administration (SBA) is not actually a lender, but they do offer great support for businesses who are unable to receive funding from other sources. If you think your business would qualify, you should explore the SBA’s 7(a) and Microloan loan programs. Either one of those would be a suitable way to help a business owner secure short-term business funding to purchase inventory.