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.