For small-business owners setting up a new store, whether a physical location or online, one of the biggest hurdles to opening can be stocking the inventory. If you don’t have enough capital to stock the shelves, one option is to apply for an inventory loan.
An inventory loan is different than a traditional business loan because it uses the purchased inventory as the collateral on the loan. Getting an inventory loan can be especially helpful for younger businesses who don’t have great business credit yet.
“The inventory serves two purposes,” says Bernard Reisz, CEO of ReSure Financial. “First, it is the bank’s collateral, and second that inventory is intended for sale, and hence will be converted to cash. It is the source of the loan repayment.” Through inventory loans, companies get “early access” to the cash that’s tied up in their inventory.
Some online lenders don’t require the inventory to be posted as collateral, but it’s worth noting that may mean less favorable loan rates. If your inventory needs are relatively regular, you can instead apply for an inventory line of credit to borrow against for purchases.
What the best inventory loans have
When shopping around for an inventory loan, it’s important to understand what you’ll be able to qualify for. Each bank will have requirements, including:
- A minimum personal credit score
- Minimum annual business revenue
- Minimum time in business
It’s important to shop around to see which lenders match up to your situation. Be aware that lenders with looser qualification standards usually make up for that risk with higher interest rates.
Things to look out for with inventory loans
Banks give inventory loans based on the idea that you will be able to sell your products. Since no two businesses or products are identical, this can make the loan approval process somewhat subjective.
“Terms that impact the appeal of inventory loans include the advance rate, or the percentage of the value of the inventory against which the bank is willing to lend,” Reisz says. “It also includes eligible/ineligibles, the nature of the inventory against which the bank will lend, which could be based on type, age, location and many other factors.”
Best inventory loan for successful businesses
OnDeck OnDeck is a completely online lender that evaluates small businesses a little differently. It uses a proprietary software that evaluates a business based on its success rather than the owner’s personal credit. So, if you have a thriving business but need a way to get the inventory to keep your success going, consider OnDeck.
Best inventory loan for no/low credit
Kabbage A key strength for Kabbage is its quick application process, which can be completed in as little as 10 minutes. Kabbage doesn’t require the level of personal credit scores of other lenders, making it easier for business owners with no/low credit to get the inventory loan they need. All of Kabbage’s loans are made by Utah-chartered Celtic Bank.
Best inventory loan for good credit
Funding Circle Funding Circle is a peer-to-peer lending marketplace instead of a traditional lending institution. Small businesses fill out an application, and then Funding Circle’s loan specialists assign the borrower a grade from A+ to C. This allows accredited investors to see what kind of risk is projected for them to lend money. If you want to bet on yourself and think your business would be appealing to investors, Funding Circle could be the right option.
Best inventory loan for low-revenue small businesses
Balboa Capital Balboa Capital specializes in small-business financing, including equipment leasing and merchant cash advances. One of Balboa Capital’s biggest strengths is its rapid turnaround time, being able to fund up to 95% of costs and provide leasing documentation on the same day you apply. Balboa also doesn’t require as much business revenue as some other business loan lenders, making it ideal for younger businesses without a lengthy balance sheet.
Best alternative inventory loan for online businesses
Bitbond If you’re interested in the world of bitcoin, Bitbond is a bank alternative worth considering. Bitbond is a peer-to-peer lender that specializes in loans in bitcoin and caters specifically to small online businesses, including eBay sellers. However, with the fluctuation in bitcoin prices, it can be a riskier borrowing strategy than conventional banks.
Getting your small-business inventory loan
There are many factors that go into receiving an inventory loan for your small business. You’ll need to understand how much revenue your business is currently making and what your personal and business credit scores are. The younger your business is, the more difficult it may be to obtain an inventory loan at competitive rates. Consider looking at peer-to-peer lending sites as well as traditional banks to see which options fit your needs best. For a list of small-business lenders, head to our business loans page.