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Inventory Financing in Ecommerce: How Does It Work? 

Ashwani Shoda
By Ashwani Shoda
Published on 23 Jan 2025 10 min read
Inventory Financing in Ecommerce: How Does It Work? 

As your business scales, so does the need for cash to stock up on products that meet growing consumer demand. 

Enter inventory financing: a game-changing solution designed to fuel your entrepreneurial dreams by providing the capital you need right when you need it. But first, you must ensure that your financials comply with the industry and portray an accurate picture of your business health.

With doola’s comprehensive bookkeeping software, you can easily input and organize all your financial data in one centralized platform without manual record-keeping. This allows you to clearly understand your business’s financial health at any given time, making it easier to make informed decisions.

Now, back to the basics: What exactly is inventory financing, and how can it help streamline operations and boost profits in an increasingly competitive market? 

In this blog, we will unravel the nuts and bolts of inventory financing in ecommerce, exploring how it works and why savvy online retailers are leveraging it to maximize their potential.

Whether you’re just starting or looking to take your established store to new heights, understanding this financial tool could be pivotal for your success. Let’s dive in!

How Inventory Financing Works in Ecommerce

How Inventory Financing Works in Ecommerce

Inventory financing is a type of funding or loan that allows ecommerce businesses to secure the capital needed to purchase inventory without having to deplete their cash flow. 

In essence, this form of financing leverages a company’s current inventory as collateral for a loan, providing the necessary funds to operate and grow the business.

To begin the process, you must finalize the inventory you need and the amount of funding required to purchase it. You can do sales forecasting based on past trends to plan exactly how much inventory you will need over what period of time. 

This will help you avoid sending in orders that are too large, which might require longer storage periods to sell out, resulting in extra warehousing costs.

Then, you can approach a lender with your forecasted inventory needs and apply for an inventory financing loan. While each lender has different requirements and guidelines, they usually offer 50-80% of the inventory’s value, and you have to cover the rest.

Additionally, many lenders offer flexible repayment terms that allow businesses to pay back what they owe when it fits best with their budget and sales cycle. These terms can range from a few months to several years, depending on the lender and the amount of funding needed.

However, this costs you interest with an annual percentage rate that can range from lows of 4% to highs of 99%, so make sure to compare as many options as possible to find the best deal.

Types of Inventory Financing

Each type of inventory financing has advantages and disadvantages, and choosing the right one depends on your business’s specific needs and goals.

That’s why understanding their differences can help you make sound financial decisions that align with your goals and capabilities. 

1. Business Term Loan

A business term loan is a type of financing that provides a lump sum upfront, which is then repaid with fixed payments over a set period of time. 

This type of inventory financing can be used by businesses to finance their inventory purchases to fulfill customer orders. 

This option is ideal for small businesses since the inventory itself acts as collateral to secure the loan, which is a good way to order a large batch of inventory.

While this can mean a lower per-unit cost, lenders carefully assess the value of the products a company wants to buy before agreeing on the final sum.

2. Inventory Revolving Lines of Credit

Another popular option for ecommerce businesses is an inventory revolving line of credit, which provides ongoing access to funds based on the value of current inventory levels. This means that as you sell products and replenish your stock, you can draw on more credit without constantly reapplying for funding. 

These lines usually come with variable interest rates and can only be used for inventory purchases. 

Similar to a credit card, you also get access to more funding each time you pay back your previous loan.

These types of loans are easily obtained, tend to have very lenient requirements and ensure better loan conditions later on. 

Who Should Use Inventory Financing?

Inventory financing is an ideal solution for small and medium-sized businesses (SMBs) that lack access to large amounts of capital. These businesses often struggle to secure traditional bank loans due to strict eligibility requirements or a lack of credit history. 

Inventory financing allows them to obtain the necessary funds to purchase inventory and keep up with demand without having to worry about lengthy approval processes.

Similarly, seasonal businesses can obtain the necessary funds to stock up on inventory before busy periods, allowing them to maximize profits without being burdened by upfront costs.

This is also a lifesaver for ecommerce businesses that are experiencing rapid growth and new businesses that may not have established revenue streams or credit history.

Inventory financing allows these businesses to quickly secure funding without relying on cash flow from sales alone. 

Benefits of Inventory Financing

Benefits of Inventory Financing

Recent studies have shown that businesses using inventory financing experience an average growth rate of 40% compared to those that rely on traditional loans or self-financing methods. 

It allows ecommerce businesses to stay competitive and meet customer demands without risking their cash flow or taking on too much debt.

Here are some more benefits of inventory financing and how it can help your business thrive.

1. Increased Cash Flow

Instead of waiting for customers to pay for their orders, businesses can use inventory financing to purchase the products they need to fulfill those orders. 

This allows for faster turnaround times and enables businesses to stay ahead of their competition.

2. Flexibility

Unlike traditional loans with fixed monthly payments, inventory financing allows businesses to make smaller repayments based on their sales cycles. 

This way, they can manage their cash flow more effectively while still being able to replenish stock and meet customer demand.

3. Scalability

With inventory financing, businesses have access to funds that can be explicitly used to purchase additional stock or expand into new markets. 

As a result, companies are not limited by their current cash reserves and can scale up their operations without worrying about running out of funds.

4. Lower Interest Rates

4. Lower Interest Rates

Inventory financing typically has lower interest rates than other types of business loans because the goods act as collateral for the lender. 

This makes it a cost-effective option for businesses looking to finance their inventory needs at a reasonable rate.

5. Improved Supplier Relationships

Due to increased buying power, businesses can access immediate funds through inventory financing and pay their suppliers on time or even negotiate better terms with them. 

This helps build stronger relationships with suppliers, which may lead to better pricing or extended credit terms in the future.

6. Reliable Stock Levels

With inventory financing, businesses have greater control over maintaining optimal stock levels at all times. 

This helps prevent stock shortages or excess stock levels that lead to excessive costs such as storage fees.

Risks and Challenges of Inventory Financing

While inventory financing offers a valuable option for ecommerce businesses to obtain funds quickly and efficiently, you must carefully consider the potential risks and challenges associated with this method. 

⚠️ Limited Options for Smaller Businesses 

Inventory financing can be an excellent option for larger businesses with strong credit scores and a proven track record of success. 

However, smaller or newer ecommerce businesses may struggle to find lenders willing to provide them with funding through this method due to their lack of established financial history. 

This limitation can make it difficult for small businesses to secure inventory financing despite their need for cash flow.

⚠️ Potential Stock Shortage

⚠️ Potential Stock Shortage

Another risk associated with inventory financing is that if sales are delayed or merchandise quality issues arise.

Ecommerce businesses could face a revenue shortfall, which would then affect their ability to repay the loan on time. 

In such scenarios, defaulting on payments could further damage the business’s credit score and relationship with lenders.

⚠️ Overstocking 

Using funds from inventory financing can result in overstocking of products, as businesses may be tempted by having access to additional capital without immediate repayment pressure.

Overstocked items could eventually lead to slow-moving stock or even losses when prices are reduced later on.

How to Qualify for Inventory Financing

Whether you qualify for inventory financing or not will depend on the amount you need, the interest you can pay, and your business history. 

While each lender has different conditions for inventory loans, you can obtain one if you can provide satisfactory data regarding your forecasted sales, suppliers, and sales channels.

However, certain criteria must be met in order to be eligible for inventory financing.

Proven Track Record

One of the first factors that lenders will look at when considering a business for inventory financing is their track record. 

Lenders want to see that the business has been in operation for a while and is already generating decent revenue. 

This demonstrates stability and the ability to generate consistent revenue, which shows lenders that you are likely to pay back the loan.

Good Credit Rating

Lenders use credit scores to indicate how likely a borrower is to repay their loan on time and in full. 

A strong credit score shows that the business has a history of responsible financial management and reduces the lender’s risk.

Good Inventory Management Practices

Good Inventory Management Practices

Lenders will also want to see that the business has effective inventory management practices before approving it for financing. 

This includes accurate records of current inventory levels, forecasting future demand, and systems for tracking sales and restocking orders to ensure inventory is managed efficiently.

A Strong Business Plan

Having a well-crafted business plan can significantly increase your chances of getting approved for inventory financing. 

This shows the lender that you have clearly thought out your business strategy, including how you plan to utilize the loan funds and how they will benefit your overall growth.

Strong Relationship with Suppliers

Having a strong and reliable relationship with your suppliers can also be a contributing factor in qualifying for inventory financing. 

This demonstrates to lenders that you have established partnerships and a stable supply chain, which is crucial for maintaining inventory levels.

Top Lenders and Financing Options for Inventory Financing

Top Lenders and Financing Options for Inventory Financing

Finding the right lender and financing option is crucial for successful inventory financing in ecommerce. 

However, this can be like finding a needle in a haystack, which is why we have brought you some of the top lenders and financing options for inventory financing that you should consider.

1. OnDeck: Best Inventory Financing for Short-Term Loans

OnDeck offers relatively short repayment terms and varied loan amounts, which is perfect for small businesses looking for short-term inventory loans. 

While you could receive same-day funding in some locations, the funding timeline typically takes two to three business days.

✔️ Offers loan amounts from $5,000 up to $250,000

✔️ Starting interest rate is at 31.30% (for at least 5% of customers)*

✔️ Term length is 18 to 24 months

✔️ Minimum APR offered to at least 5% of customers

2. Bluevine: Best Inventory Financing for Lines of Credit

Bluevine is an ideal choice if you’re looking for an inventory line of credit to cover occasional and recurring expenses.

With a fast application process and same-day disbursal, you could get a line of credit up to $250,000, only paying interest on the withdrawn amounts.

✔️ Offers loan amounts from $6,000 to $250,000

✔️ Starting interest rate at 7.80%

✔️ Term length is 6 or 12 months

3. Fundbox: Best Inventory Financing for Startups

Fundbox is an excellent choice for newly established businesses due to its startup business line of credit, which can help them cover inventory and other essential startup expenses. 

While its credit limit is only $150,000, its less stringent eligibility requirements can make it easier for startups to qualify.

✔️ Offers loan amounts Up to $150,000

✔️ Starting interest rate at 4.66% for 3-month terms and 8.99% for 12-month terms

✔️ Term length is 3 or 12 months

How to Determine If Inventory Financing Is Right for Your Ecommerce Business

Inventory financing works best when there is a steady turnover of products, and potential profits from selling those products can cover both initial costs and interest fees. 

Therefore, it’s essential to carefully track customer demand trends to ensure that you are investing in popular items that will sell quickly.

Consider researching different types of inventory financing options available in the market before deciding if one is right for you. Some providers offer line-of-credit options, while others provide purchase order financing or asset-based loans. 

Each option has its own terms and requirements, so it’s crucial to select one that aligns with your business needs and capabilities.

Consider factors such as cash flow, seasonality, credit score, inventory turnover rate, and available financing options to determine if this funding option is the right fit for your ecommerce business.

Tips for Managing Inventory Financing Successfully

Tips for Managing Inventory Financing Successfully

Managing inventory financing successfully involves efficiently balancing the financial aspect of inventory management with maintaining a steady flow of products to meet customer demand. 

Here are some tips that can help you do this without a headache.

Set Inventory Goals

Your goals should align with your long-term business objectives and consider factors such as seasonality, new product launches, and marketing strategies. 

Regularly monitoring these goals will help you stay on track and make necessary adjustments to optimize your inventory management.

Invest in Inventory Management Software

Investing in reliable inventory management software can significantly help you manage your finances efficiently. 

These tools provide real-time data tracking, automated reordering processes based on pre-set levels, and reports that help analyze revenue streams by product category or supplier.

Negotiate with Suppliers

Good relationships with suppliers are crucial for successful inventory financing management as they directly impact your cost of goods sold (COGS). 

Negotiating better rates or payment terms with suppliers can significantly improve cash flow while staying within budget constraints.

Implement Just-In-Time (JIT) Inventory Model

JIT is an inventory strategy that aims at receiving goods only when needed instead of stocking items for future use. 

This model reduces carrying costs associated with storing excess stock while allowing businesses to respond quickly to fluctuations in demand.

Track Key Performance Indicators (KPIs)

Monitoring key performance indicators related to inventory turnover rate, gross margin, and stockout rates can provide insight into how efficiently your inventory is being managed. 

Regularly tracking these KPIs and making necessary adjustments based on the data will enable you to optimize your inventory financing.

Keep All Your Financials in the Green With doola Bookkeeping

When to Choose doola

Keeping all your financials in check is vital for stable and sustainable growth, and doola Bookkeeping can play a significant role in this aspect. 

With doola’s user-friendly bookkeeping software, you can easily manage your finances without the headache of manual calculations or spreadsheets. It automatically imports real-time data on sales, expenses, assets, and liabilities, giving you a comprehensive overview of your financial health at any given time. 

Such accurate record-keeping not only facilitates smoother day-to-day operations but also helps you make informed decisions about future investments.

Moreover, doola offers dedicated services that connect you with a team of bookkeepers and accounting professionals who work closely with you to design a plan that aligns with your goals.

By utilizing their expertise and network in the financial world, you can future-proof your business finances and ensure swift approval from lenders for inventory financing solutions.

So, you can access funds quickly when needed rather than worrying about empty shelves or overspending on surplus stock during low periods.

Book a demo today so you can focus on expanding your online store without any financial stress.

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Inventory Financing in Ecommerce: How Does It Work?