Inventory Financing for U.S. Companies

A U.S. distributor has USD 15 million of inventory sitting in warehouses and another USD 8 million of receivables. Suppliers need to be paid now, but customers will not pay for another 30 to 75 days.

The company has assets. Its problem is timing.

Inventory financing can convert eligible stock into borrowing capacity before the inventory is sold. The facility can finance purchasing, seasonal stock builds, manufacturing inputs, imported merchandise and the working-capital gap between supplier payment and customer collection.

Depending on the company and collateral, the financing can be structured as a revolving borrowing-base facility, asset-based line of credit, inventory-backed loan, purchase facility or combined inventory and receivables facility.

What Is Inventory Financing?

Inventory financing is debt secured or supported by goods a business owns or is purchasing for resale, manufacturing or distribution.

The lender identifies which inventory it considers eligible, applies an advance methodology and establishes the amount the borrower can draw.

Unlike an ordinary unsecured business loan, availability can be tied directly to the collateral base.

Financely's inventory finance facilities are structured around the borrower's actual stock cycle, supplier obligations and expected conversion of inventory into receivables and cash.

Where the Financing Gap Occurs

Inventory consumes cash before it generates cash.

That cycle can take weeks or months.

A company growing quickly can therefore become more cash-constrained even while revenue and gross profit are increasing.

More sales require more purchasing. More purchasing creates more inventory. Inventory then remains on the balance sheet until it is sold and converted into receivables.

Inventory financing places a working-capital facility inside that cycle rather than forcing the company to fund every additional purchase from retained cash.

What Inventory Can Be Financed?

Financeability depends on what the inventory is, where it is stored, how quickly it sells and how much value a lender could realistically recover from it.

Finished Goods

Finished goods that can be sold to multiple customers are generally easier to evaluate than highly specialized stock with only one potential buyer.

The lender will examine SKU data, sales history, aging, margins, obsolescence and liquidation characteristics.

Raw Materials

Manufacturers can have substantial value tied up in steel, chemicals, components, packaging, electronic parts or other production inputs.

Raw materials can support financing where the lender can establish ownership, value, usage and recoverability.

Work in Progress

Work in progress is more difficult.

A half-completed specialized machine can cost millions of dollars while having limited liquidation value outside the underlying customer contract.

Lenders therefore often treat WIP differently from finished inventory and readily marketable raw materials.

A Borrowing-Base Facility

A borrowing base connects the amount available under the facility to eligible collateral.

Instead of committing USD 10 million solely because the borrower requests USD 10 million, the lender calculates availability from an agreed formula.

The percentages and reserves are lender-specific.

Inventory availability can also be constrained by appraised liquidation values rather than calculated exclusively from book cost.

Financely also arranges borrowing-base facilities for working capital where inventory is financed together with receivables or other eligible operating assets.

Example Inventory Financing Facility

Consider a U.S. distributor importing industrial components and selling them to domestic manufacturers.

The lender reviews the inventory ledger and separates eligible stock from slow-moving, obsolete or otherwise excluded goods.

Eligible receivables are analyzed separately.

The resulting borrowing base supports a revolving facility. The distributor draws when it needs to pay suppliers and repays the line as customers pay invoices.

As the collateral base grows, availability can increase within the committed facility. If inventory and receivables fall, borrowing capacity can decline.

Inventory Financing vs. an Unsecured Business Loan

An unsecured lender relies heavily on the company's general cash flow and credit profile.

An inventory lender has an additional source of repayment through collateral.

This can make asset-based financing relevant for businesses whose balance sheets contain substantial working-capital assets but whose cash conversion cycle limits the amount available under conventional unsecured credit.

Inventory Financing vs. Purchase Order Financing

These facilities solve different stages of the working-capital cycle.

Purchase order financing is generally tied to fulfilling a specific customer order and can fund supplier or production costs before the borrower owns finished inventory.

Inventory financing is built around goods already owned or purchased into an eligible collateral pool.

A growing distributor can use both structures at different stages.

A transaction involving imported merchandise can also require purchase-side financing before the stock reaches the U.S. warehouse. Financely has a separate purchase financing structure for importers buying inventory for that stage of the cycle.

Inventory and Receivables Financing Together

Inventory normally converts into accounts receivable before it converts into cash.

Financing only the inventory can therefore leave a second liquidity gap after the product is sold.

Consider goods worth USD 1 million in eligible inventory.

Once those goods are shipped to customers, they disappear from the inventory borrowing base. If customers have 60-day payment terms, the value has moved into accounts receivable rather than immediately into cash.

A combined inventory and A/R revolver allows borrowing availability to follow the asset through that conversion cycle.

Seasonal Inventory Financing

Seasonal businesses can require substantially more working capital for part of the year than their average balance sheet suggests.

A distributor can carry USD 5 million of inventory for most of the year and need USD 12 million before its peak selling season.

A facility built only around the company's low-season requirement can leave it unable to purchase enough stock when demand is strongest.

A revolving inventory facility can be structured around that peak requirement, subject to sufficient eligible collateral and the lender's commitment.

The lender will want historical evidence showing how inventory builds, when it sells and how quickly the resulting receivables convert to cash.

Inventory Financing for Importers

Importers face an additional timing problem because inventory can consume cash before it reaches the domestic warehouse.

The cycle can include:

• supplier deposit;
• production period;
• balance payment before shipment;
• ocean or air freight;
• customs clearance;
• duties and logistics costs;
• domestic warehousing;
• customer sale; and
• customer payment terms.

A conventional domestic inventory line may begin borrowing eligibility only after goods meet the lender's location and control requirements.

Import-heavy companies can therefore require a broader structure combining supplier finance, import finance or letters of credit with domestic inventory and receivables financing.

How Lenders Determine Eligible Inventory

Gross inventory on the balance sheet is not the same as eligible inventory in a borrowing base.

Lenders can exclude or reserve against stock that is:

• obsolete;
• slow-moving;
• damaged;
• consigned;
• subject to another creditor's lien;
• located somewhere the lender cannot adequately control;
• in transit;
• unfinished;
• highly customized;
• subject to unusual contractual restrictions;
• difficult to liquidate; or
• otherwise outside the lender's eligibility criteria.

The financing amount should therefore be modeled from eligible collateral rather than from total balance-sheet inventory.

Inventory Appraisals

Book cost tells the lender what the company paid.

It does not necessarily tell the lender what the goods could produce in a downside liquidation.

For material asset-based facilities, lenders can commission specialist inventory appraisals.

The appraisal can analyze:

• inventory categories;
• historical sales;
• gross margins;
• inventory turns;
• age;
• obsolescence;
• customer demand;
• secondary markets;
• expected liquidation period;
• liquidation expenses; and
• estimated recoverable value under the appraisal methodology.

That analysis can become an important constraint on inventory availability under the facility.

Warehouse Location and Control Matter

A lender needs to know where its collateral is.

Inventory held in the borrower's own facility can require different documentation from stock held by a third-party warehouse, processor, logistics provider or fulfillment center.

Depending on the structure, lenders can require:

• warehouse agreements;
• landlord waivers;
• bailee acknowledgments;
• warehouse receipts;
• inventory reports;
• insurance evidence;
• site inspections; and
• additional collateral-control documentation.

A valuable inventory pool held across ten warehouses cannot be underwritten responsibly if the lender cannot establish where the goods are and which third parties have rights over them.

UCC Liens and Existing Debt

Inventory lenders also examine whether another creditor already has a security interest in the collateral.

Existing bank facilities, equipment lenders, acquisition debt and other secured creditors can affect lien priority.

A company cannot assume that USD 15 million of inventory is freely available to support a new lender simply because the stock appears on its balance sheet.

Existing liens and intercreditor requirements should be identified before the financing is marketed.

Revolving Facility vs. Inventory-Backed Term Loan

A revolving facility is generally better suited to a collateral base that continuously turns over.

The borrower draws capital, sells inventory, collects receivables, repays the line and draws again.

A term loan can be appropriate where the financing need is more fixed or where the lender is relying on a broader asset package rather than day-to-day borrowing-base availability.

Financely also works on broader asset-based lending facilities where inventory forms only one part of the collateral package.

What Can Inventory Financing Be Used For?

Depending on the facility, proceeds can support:

• supplier payments;
• inventory purchases;
• seasonal stock builds;
• raw-material purchases;
• imported merchandise;
• manufacturing inputs;
• general working capital;
• growth in customer orders;
• refinancing an existing inventory line; and
• liquidity associated with a business acquisition or expansion.

Permitted uses ultimately depend on the lender's credit approval and financing documents.

What Makes Inventory Financeable?

Strong candidates generally have:

• an established operating business;
• meaningful inventory balances;
• reliable perpetual inventory records;
• historical sales data;
• reasonable inventory turnover;
• limited obsolescence;
• identifiable warehouse locations;
• adequate insurance;
• credible financial reporting;
• transparent existing liens;
• positive gross margins;
• a clear route from inventory to customer collection; and
• management capable of producing regular collateral reporting.

The collateral has to be measurable. If neither the borrower nor the lender can determine what inventory exists, where it is located and how quickly it sells, a borrowing-base facility becomes difficult to administer.

Inventory That Lenders May Discount Heavily

Not all stock has equal collateral value.

Difficult categories can include:

• perishable goods with short shelf lives;
• fashion inventory with rapid seasonality;
• obsolete electronics;
• custom-built goods usable by only one customer;
• unfinished goods requiring substantial additional expenditure;
• inventory with uncertain title;
• goods subject to third-party claims;
• restricted or regulated products;
• stock without reliable records; and
• inventory with limited secondary-market demand.

A company can have substantial accounting inventory while having a much smaller financeable inventory base.

Inventory Turnover Matters

Lenders want collateral that converts into cash.

Inventory that has remained unsold for 18 months presents a different recovery profile from products consistently sold within 60 days.

Aging reports, SKU-level sales history and inventory turns help demonstrate that the borrowing base is made up of operating assets rather than stock that has accumulated because it cannot be sold.

Rapid growth can justify increasing inventory balances. The borrower should still be able to connect that growth to historical demand, customer orders or a defensible sales forecast.

Borrowing-Base Reporting

Inventory financing creates an ongoing reporting obligation.

The borrower can be required to submit regular borrowing-base certificates showing eligible inventory, receivables and reserves.

Reporting can include:

• inventory by SKU;
• inventory by location;
• inventory aging;
• inventory reconciliations;
• A/R aging;
• accounts payable;
• sales reports;
• borrowing-base calculations;
• availability;
• reserves; and
• compliance certificates.

Companies without reliable inventory systems often need to improve reporting before a lender will provide material asset-based availability.

Field Examinations

Asset-based lenders can perform field examinations before closing and periodically afterward.

The objective is to test whether the financial and collateral information supplied by the borrower accurately reflects the business.

The review can cover:

• inventory reporting;
• receivables;
• cash receipts;
• credit memos;
• customer concentration;
• accounts payable;
• inventory systems;
• financial reconciliations; and
• borrowing-base procedures.

Borrowers should budget for lender diligence rather than treating the transaction as a simple submission of year-end financial statements.

How Much Can a Company Borrow Against Inventory?

There is no universal inventory advance rate.

A lender considers cost, market value, liquidation analysis, eligibility, turnover and collateral controls before calculating availability.

The resulting advance can also be constrained by the overall facility commitment and reserves.

Companies should be cautious with financing proposals that promise a fixed percentage of total inventory before reviewing what the stock consists of.

What Does Inventory Financing Cost?

Pricing varies materially by borrower quality and structure.

The total economics can include:

• interest margin;
• unused commitment fee;
• origination fee;
• field examination costs;
• inventory appraisal costs;
• legal fees;
• monitoring charges;
• collateral-control expenses;
• amendment fees; and
• advisory or placement fees where an external advisor structures the transaction.

A borrower should compare total facility economics against the additional gross profit and liquidity the line allows it to generate.

When Inventory Financing Makes Sense

The structure is particularly relevant when:

• growth is consuming cash;
• supplier terms are shorter than customer payment terms;
• seasonal inventory needs exceed normal liquidity;
• a company imports goods well before receiving customer payment;
• large customer orders require inventory purchases;
• the borrower has substantial unencumbered stock;
• an existing bank line is too small;
• a conventional cash-flow lender does not give enough value to working-capital assets; or
• the company wants a facility capable of growing with the collateral base.

When Inventory Financing Is a Poor Fit

Transactions become difficult where:

• inventory records are unreliable;
• most stock is obsolete or slow-moving;
• ownership cannot be established;
• another lender already controls substantially all inventory;
• goods are highly customized and difficult to resell;
• the business consistently loses money without a credible turnaround;
• inventory is located in jurisdictions or facilities the lender cannot adequately control;
• the requested facility substantially exceeds realistic collateral value; or
• management cannot produce regular borrowing-base reporting.

Information Required for an Inventory Financing Request

For an initial lender assessment, companies should be prepared to provide:

• two to three years of historical financial statements;
• current year-to-date financials;
• inventory ledger;
• inventory by location;
• inventory aging;
• inventory turnover data;
• SKU-level data where appropriate;
• accounts receivable aging;
• accounts payable aging;
• customer concentration;
• supplier concentration;
• existing debt schedule;
• existing lien information;
• warehouse details;
• insurance;
• requested facility amount;
• use of proceeds; and
• financial projections where growth is driving the request.

A clean collateral package makes it easier to determine lender fit before a transaction is broadly distributed.

What Financely Does

Financely provides paid structured-finance advisory for established companies seeking inventory-backed working capital.

Depending on the mandate, our work can include:

• initial borrower screening;
• inventory eligibility analysis;
• borrowing-base modeling;
• working-capital cycle analysis;
• facility sizing;
• inventory and receivables structure design;
• existing lien review;
• collateral reporting preparation;
• lender-facing information memorandum;
• data-room preparation;
• bank and non-bank ABL lender identification;
• private credit and specialty lender identification where appropriate;
• capital-provider distribution;
• term-sheet comparison;
• field exam and appraisal coordination;
• due-diligence coordination; and
• support through facility documentation and closing.

Inventory Financing FAQ

Can a business borrow against inventory?

Yes. Eligible inventory can support a revolving or term financing facility where the lender is comfortable with ownership, value, turnover, location and liquidation characteristics.

How much can a company borrow against inventory?

The amount depends on eligible inventory, appraised value, advance methodology, reserves and the lender's overall facility commitment. There is no universal advance percentage applicable to every inventory pool.

Can raw materials be financed?

Potentially. Lenders evaluate the type of material, ownership, storage, usage, marketability and recoverable value before determining eligibility.

Can work in progress be financed?

Sometimes, but WIP can receive less borrowing value because unfinished products may require additional expenditure before they can be sold. Highly customized WIP can be particularly difficult collateral.

Can imported goods be financed while in transit?

Potentially, through an appropriately structured import or trade finance facility. In-transit financing introduces additional questions around title, transport documents, insurance and lender control.

Does inventory financing require a personal guarantee?

Requirements vary by lender, borrower size, ownership structure and credit profile. Institutional facilities are negotiated transaction by transaction rather than subject to one universal guarantee requirement.

Can inventory and accounts receivable be financed together?

Yes. Combined borrowing-base facilities frequently use both asset classes so that financing can follow the company's working capital as inventory converts into receivables and then cash.

Can inventory financing replace a bank line?

Yes, where a new bank, asset-based lender or private credit provider is willing to refinance the existing facility and obtain the required collateral position.

Does the lender need an inventory appraisal?

Material asset-based facilities can require a third-party appraisal. The lender determines whether one is necessary and how frequently it must be updated.

What businesses are good candidates for inventory financing?

Distributors, wholesalers, manufacturers, importers and other established businesses with material inventory balances, reliable records and recurring sales are common candidates for inventory-backed working capital.

Need Working Capital Against Inventory?

If your business has capital tied up in raw materials, imported merchandise or finished goods, Financely can assess whether those assets can support a working-capital facility.

We review inventory quality, turnover, receivables, existing liens, warehouse locations, supplier terms and the amount of liquidity required.

Submit your latest financial statements, inventory report, A/R aging, debt schedule and requested facility amount. Where the transaction fits our mandate criteria, we can quote the advisory and lender-placement work required.