What is an Inventory Loan? Here's Everything You Need To Know

Table of contents

Inventory loan is a form of asset-based term loan in which a lender provides you with capital to purchase inventory.

While lenders usually require equipment or real estate assets as collateral for bank loans, an inventory loan is collateralized by the inventory you purchase. In other words, the creditor will seize and sell your inventory if you fail to repay.

Inventory loans are helpful for preparation of peak seasons, during which you need to make bulk purchases of goods that tie up a significant amount of capital.

However, this type of loan may not give you sufficient funds to support business growth, such as product launch or market expansion.

Pros and cons of inventory loans

Advantages Explanation
Less stringent requirement on collateral Instead of securing the loan with expensive business assets, the only collateral is your inventory.
Easier to qualify
  • Your company's credit history is not the major factor which determines whether you qualify for an inventory loan.
  • Your eligibility for loan and loan amount depend on the estimated value of your inventory.
  • The “time in business” requirement is usually less stringent than that in other lending options. Companies whose operating histories are as short as 6-12 months could apply for inventory loans.
  • Disadvantages Explanation
    Loan amount limited by inventory value The loan amount is usually limited to 20%-65% of your inventory’s appraised value.
    Relatively high interest rates Inventory loan providers usually charge higher interest rates than other lenders.
    Automatic repayment Instead of repaying on a fixed schedule, some lenders take the cash directly from your inventory sales.
    Loan covenants Loan covenants may be imposed by the lenders. For example, you may be asked to use the borrowed funds only for inventory purchase, or to have the collateralized inventory covered by insurance.
    Larger installment payments Inventory loans are short-term loans. For inventory loans that require repayment in installments, each installment could be large.
    Unpredictable risks tied to sales performance Repayment of inventory loans is largely dependent on selling inventory to customers. Weak sales could negatively affect your ability to repay.