Financing Inventory is an important cash flow management tool for any business that purchases, processes, or resells goods. Yet, businesses often only look to finance inventory at the last minute instead of planning ahead. Inventory requires large amounts of cash flow. Businesses must pay their vendors well before they collect revenue. When cash flow is tight, the delay before collections occur can be financially burdensome.

Businesses need to know how to finance inventory correctly to survive and thrive. There are two considerations: having enough inventory to prevent shortages, which can result in lost sales, but not so much inventory as to use up the cash flow necessary to pay wages, expenses, and vendors.

In this article, we'll discuss what businesses need to know about financing inventory, how it can help sustain growth, what kinds of businesses it's best suited to, and what solutions are available to help businesses finance inventory.

Key takeaways

• Financing inventory includes multiple tools that help businesses obtain the liquidity they need to procure or replenish their merchandise, raw materials, and finished products without using their own cash flow.
  
• Financing inventory is different from inventory factoring because, for the former, the financing comes first. Financing inventory procures future goods that don't yet appear on the balance sheet, while inventory factoring pledges existing business assets as collateral to free up dormant liquidity.
  
• There are many reasons to seek financing for inventory, such as building up initial inventory to launch a business, bridging gaps between payments to vendors and revenue from customers, and seizing occasional purchasing opportunities.
  
• Financing inventory can be useful for many types of businesses, including retailers and wholesalers—whose businesses depend on inventory, as well as expanding online businesses, manufacturers and food processors, and seasonal businesses in the tourism, textile, and agricultural industries.
  
• Financing inventory can include: vendor credit as part of a business relationship, short-term bank credit facilities (e.g., authorised overdrafts and credit facilities for occasional needs), and seasonal loans for cyclical businesses.
  

What does financing inventory mean?

Financing inventory involves financial tools that help businesses obtain the liquidity they need to acquire or replenish merchandise, raw materials, and finished products without immobilising their own cash flow. It often takes the form of short-term credit used to build up inventory that is paid back when sales revenue comes in.

What's the difference between financing inventory and inventory factoring?

Financing inventory involves the procurement of future inventory. Businesses borrow money to acquire goods that they don't yet own. Inventory factoring means using inventory already owned and paid for as collateral to obtain liquidity. The former occurs prior to a purchase, while the latter makes use of existing assets.

Each method fills a different need and is based on a different legal mechanism. When inventory is financed, credit finances future expenses. The goods don't yet appear on the business's balance sheet. In inventory factoring, a business already has usable—but currently dormant—assets and it pledges them to financial institutions as collateral to free up cash flow.

Why finance inventory?

Financing inventory gives businesses the liquidity to purchase goods and products without using cash flow. It allows them to seize purchasing opportunities, absorb fluctuations, negotiate better vendor terms, and sustain growth while preserving the liquidity necessary for business operating cycles.

The primary benefits of financing inventory are as follows:

• Financing initial inventory
  When launching a retail, distribution, or online shop, businesses need to build up initial inventory before making sales. Financing allows businesses to reserve cash flow to pay expenses for the first few months without using up excessive initial capital.
  
• Preserving working capital and bridging cash flow gaps
  A gap of several weeks can occur between the time vendors are paid and when customers generate revenue. This can cause cash flow issues and negatively impact working capital requirements (WCRs). Financing inventory bridges the gap and avoids a business using cash flow for each inventory purchase. This is particularly important in France, as nearly 30% of businesses (excluding microbusinesses) pay or are paid after the legal 60-day payment deadline.
  
• Seizing purchasing opportunities
  A vendor's promotional offer, clearance sale, or special order can occur at any time, even when cash flow is tight. Having financing ready gives businesses the ability to seize opportunities immediately and turn them into additional profits rather than missing out.
  
• Obtaining better vendor terms
  Financing inventory can allow businesses to buy in larger quantities or pay invoices more quickly, which can mean receiving discounts, special rates, or better terms of sale. These savings can offset the cost of financing.
  
• Securing supply chains
  When geopolitical events cause delivery times to grow longer and shortages to become more frequent, businesses can build up reserves of raw materials or important components to guard against supply chain fluctuations.
  
• Preventing shortages
  Businesses without sufficient inventory risk losing sales or, in extreme cases, losing customers. Financing inventory allows businesses to maintain inventory or the raw materials necessary to ensure product availability and to continue operations.
  
• Supporting growth and product launches
  When businesses grow sales, open new locations, expand internationally, or launch new product lines, they need to increase inventory well before any revenue is generated. Financing allows businesses to act quickly instead of putting off expansion due to a lack of cash flow.
  

Who should finance inventory?

Financing inventory is useful for any business that purchases goods or raw materials for resale or processing, including retailers, distributors, wholesalers, online businesses, manufacturers, and artisans. It is especially helpful for seasonal businesses experiencing fast growth or those in the startup phase.

Here is a list of businesses that might benefit from financing inventory:

• Retailers, distributors, and wholesalers
  Inventory is central to businesses dealing with goods since they must buy inventory for resale. Financing allows them to expand their product range, operate multiple points of sale, and seize purchasing opportunities without immobilising cash flow.
  
• Online businesses
  Online businesses are often new and tend to grow quickly. They must build up significant inventory before sales begin, without the benefit of the financial history that traditional banks require. Financing inventory can help these businesses scale up.
  
• Manufacturers and food processors
  Manufacturing cycles require raw materials, components, and packaging to be purchased well before sales can begin. Financing inventory bridges the gap between input purchases and sales of finished products.
  
• Seasonal businesses
  These include businesses in the tourism, toy, textile, winter sports, and agricultural industries. In these sectors, sales occur within the span of a few months (e.g., sales, holiday seasons, tourist seasons). Businesses must finance their purchases ahead of time.
  
• Fast-growing businesses
  When orders pour in faster than cash flow can be replenished and bank lines of credit have been depleted, financing inventory can eliminate obstacles and help businesses grow.
  

How to finance inventory

There are several ways to finance inventory, from vendor credit to private financing platforms. The best choice depends on the type of business (seasonal or regular), financing amount, inventory rotation time, and the business's ability to offer guarantees.

Here are the primary financing tools for businesses.

Supplier credit

Supplier credit refers to the payment deadline assigned by vendors. Businesses receive merchandise but pay for it later, typically in 30, 45, or 60 days. This is the fastest and most natural method of financing inventory because it is built into the business relationship. When negotiated correctly, vendor credit can finance a significant portion of inventory without outside assistance.

Authorised overdrafts and credit facilities

Authorised overdrafts and credit facilities are forms of short-term bank credit facilities that allow business bank account balances to be negative for a short period of time when cash flow is used to purchase inventory. These are both short-term financing methods. Credit facilities can generally be used for no more than two weeks per month, while overdrafts are generally authorised for a year.

These forms of cash flow advances offer several benefits to businesses: quick access to liquidity, only as much funds as needed and when necessary, and interest charged only on amounts actually spent. However, interest rates tend to be higher than for traditional loans. This can become expensive if advances are used for prolonged periods.

Seasonal loans

Seasonal loans are a type of short-term cash flow credit specifically designed for seasonal and cyclical businesses. They are intended to finance inventory or raw materials ahead of the busy season and are repaid gradually as sales begin.

Seasonal loans last for nine months or more. They can be useful because they follow the business cycle and allow businesses to use available funds as needed. Interest rates also tend to be lower than for authorised overdrafts. However, they also frequently require guarantees, such as merchandise as collateral. This can make business owners personally responsible for repayment.

Reverse factoring

Reverse factoring is when customers pay vendor invoices before their due dates, without using cash flow, by hiring a financial institution, referred to as the "factor." The factor pays vendors in 24–48 hours, allowing the business to finance its inventory while quickly paying its vendors. The business then repays the financial institution by the invoice due date.

Reverse factoring is only used by large purchasers. Only customers can set up reverse factoring. Vendors cannot initiate it if the customer does not propose it. This process also requires close cooperation between the business, vendor, and factor to define payment terms and to ensure successful factoring.

Dedicated inventory financing by specialised platforms

Specialised platforms such as Stripe Capital offer advances to very small, small, and medium-sized businesses to finance inventory purchases and pay vendors. Businesses can sign up online. Such solutions help businesses obtain funds quickly and offer transparent pricing with single fixed fees to help businesses manage cash flow efficiently.

How Stripe Capital can help

Stripe Capital offers revenue-based financing solutions to help your business access the funds it needs to grow.

Capital can help you:

• Access growth capital faster: Get approved for a loan or merchant cash advance (MCA) in minutes – without the lengthy application process and collateral requirements of traditional bank loans.
  
• Align financing with your revenue: Capital's revenue-based structure means you pay a fixed percentage of your daily sales, so payments scale with your business performance. If the amount that you pay through sales doesn't meet the minimum due each payment period, Capital will automatically debit the remaining amount from your bank account at the end of the period.
  
• Expand with confidence: Fund growth initiatives such as marketing campaigns, new hires, inventory expansion and more – without diluting your equity or personal assets.
  
• Use Stripe's expertise: Capital provides custom financing solutions informed by Stripe's deep expertise and payments data.
  

Learn more about how Stripe Capital can fuel your business growth or get started today.