Yes, you can get a loan on inventory. Inventory financing is a form of asset-based lending in which your stock serves as collateral for either a revolving line of credit or a short-term loan. Lenders usually advance between 20% and 50% of your inventory’s appraised liquidation value, with finished, shelf-ready goods commanding the higher end of that range. The arrangement is common among retailers, wholesalers, and manufacturers that need to bridge the gap between paying suppliers and collecting from customers.
Who Qualifies for Inventory Financing
Lenders look at your business first and your inventory second. Most want at least one to two years of operating history, supported by filed tax returns and bank statements. Annual revenue thresholds vary, but many lenders expect roughly $250,000 or more in gross sales. Alternative or specialty lenders sometimes accept lower revenue if growth trends are strong.
Inventory turnover matters as much as revenue, because it tells the lender whether you can actually sell the goods you’re pledging. Expect requests for historical sales data broken out by product category so the lender can judge how consistently your stock converts to cash. A business moving product quickly is a much lower risk than one sitting on aging inventory.
Personal credit still counts, especially for smaller businesses. Traditional lenders generally look for a personal score of at least 650; alternative lenders may work with scores in the 500s, though a lower score means higher rates and tighter terms. If your business does less than roughly $1 to $2 million in annual revenue, or has limited credit history, plan on signing a personal guarantee. The inventory secures the loan, but most small-business lenders still want recourse beyond the stock itself.
What Inventory Qualifies as Collateral
Not everything in your warehouse counts. The question a lender asks is whether the goods could be sold on the secondary market for a reasonable recovery if you default.
Finished goods ready for retail sale get the most favorable treatment because they have a clear market value and can be liquidated without additional work. Raw materials qualify too, but at heavily discounted values, since converting them into sellable products takes labor and money the lender wouldn’t spend after a default. Work-in-progress inventory is usually where lenders draw the line. Partially assembled goods are hard to value, and if the borrower defaults mid-production the lender is stuck with items that may have no practical resale market. A few specialized lenders offer work-in-progress financing, but at higher rates and lower advance percentages.
Several categories get excluded or steeply discounted:
- Perishable goods like fresh food and flowers lose value too quickly to serve as reliable collateral.
- Highly seasonal products such as holiday decorations can become unsellable if default happens in the wrong month.
- Slow-moving or obsolete stock reads as a warning sign rather than an asset.
Detailed records showing inventory age and movement per category are essential. If you can’t document how long stock has been sitting and how fast each category sells, lenders assume the worst.
How Much You Can Actually Borrow
Two numbers drive the loan amount: what your inventory is worth in a liquidation scenario, and what percentage of that value the lender will advance.
Net Orderly Liquidation Value
Most lenders don’t care what you paid for your stock or what you plan to sell it for at retail. They care about the net orderly liquidation value, an estimate of what the goods would bring if sold off over a reasonable period, minus the costs of running that sale. That figure accounts for commissions, logistics, legal fees, and the reality that liquidation sales never fetch full price. A professional appraiser typically calculates it during due diligence, and it becomes the base for your borrowing limit.
Advance Rates
The advance rate is the percentage of liquidation value a lender will actually lend. Finished goods commonly see rates around 50%; raw materials may see rates closer to 20%. The gap between your inventory’s book value and what you’ll actually receive is often wider than borrowers expect.
FIFO vs. LIFO
Your accounting method changes the numbers. FIFO (first in, first out) reflects inventory at more recent purchase prices, which tends to produce a higher reported value when costs are rising. LIFO (last in, first out) values remaining stock at older, lower prices. The same physical inventory can produce meaningfully different borrowing bases depending on which method you use. Many lenders prefer FIFO because it lands closer to current market prices; if you use LIFO, expect the lender to adjust your reported figures upward or ask for supplemental data.
Common Loan Structures
Revolving Line of Credit
An inventory line of credit works something like a credit card tied to your warehouse. You draw funds to buy new stock, and the credit limit adjusts based on the current appraised value of your inventory. As you sell products and pay down the balance, capacity comes back. This structure fits the natural rhythm of buying and selling, and it’s the most popular choice for businesses with ongoing restocking needs.
Term Loan
An inventory term loan is a one-time lump sum, often for a specific purpose like a bulk purchase before a busy season. Repayment follows a fixed schedule, commonly six to twenty-four months. Because the schedule doesn’t flex with your sales cycle, term loans suit predictable, one-off investments better than day-to-day restocking.
SBA 7(a) Working Capital Pilot
The SBA’s 7(a) Working Capital Pilot lets qualifying small businesses borrow against inventory and accounts receivable with government-backed guarantees. Because the SBA shares the risk, rates and terms can beat conventional inventory financing. Qualifying requires timely, accurate financial statements, accounts receivable and payable aging reports, and inventory records.1U.S. Small Business Administration. 7(a) Loans Funding through SBA channels typically takes longer than alternative lenders, sometimes up to two weeks.
Rates, Fees, and Real Cost
Interest rates on inventory financing run higher than on real-estate-secured loans, because inventory is harder to liquidate and loses value faster. Creditworthy borrowers with established businesses commonly see APRs between 6% and 20%. Alternative lenders serving weaker credit or shorter-tenure borrowers may charge upward of 30%. Some quote monthly factor rates instead of annual percentages, which can hide the true cost. Convert to an APR before comparing offers.
Watch for these additional charges on top of interest:
- Origination fees, commonly 1% to 3% of the loan amount, taken at closing.
- Field audit fees for the initial warehouse inspection and any periodic follow-up audits, billed to the borrower and scaled to the size and complexity of your operation.
- Appraisal fees for the initial borrowing base calculation and later reassessments.
- UCC filing fees, ranging from about $10 to over $100 depending on the state.
On a $100,000 line of credit, audit, appraisal, and origination costs together can meaningfully raise your effective borrowing cost above the stated rate.
Documentation and the UCC-1 Filing
Inventory financing applications are documentation-heavy. Lenders want to see both your financial health and the specific condition of your collateral. Financial records include balance sheets and profit and loss statements for the previous two to three fiscal years, along with tax returns for the business and its owners.2SEC.gov. Inventory Financing Agreement
The inventory-specific records are where most applications stall. You’ll need comprehensive product lists with SKU-level detail, recent purchase orders showing current costs, and reports from your inventory management software documenting quantities, categories, and how long each item has been in storage. Messy records are the single most common reason applications get held up.
Once approved, the lender files a UCC-1 financing statement with your state’s Secretary of State office. This public notice tells other creditors that your lender has a security interest in your inventory. It doesn’t transfer ownership of the goods, but it establishes priority: if you later default, the lender with the earliest perfected UCC filing generally gets paid first from the collateral.3Cornell Law School. UCC Financing Statement Most inventory lenders file a blanket lien covering all business inventory, including stock you acquire in the future, rather than listing individual items. If another lender already has a filing on your assets, the new lender may require a subordination agreement spelling out who gets paid first, and sorting that out can add weeks to the process.4SEC.gov. Subordination and Intercreditor Agreement
Before funds are released, expect a field audit. A representative visits your warehouse to physically count stock, verify condition, and confirm that the shelves match your records. Storage conditions get checked too, since water damage or poor handling cuts collateral value. The audit is at your expense.
Reporting After Funding
Inventory financing comes with ongoing obligations. Lenders require regular borrowing base certificates and supporting documentation, often weekly or monthly. Higher-risk borrowers and fast-moving industries like retail may report as frequently as daily.5Office of the Comptroller of the Currency. Asset-Based Lending – Comptroller’s Handbook These reports certify the amount, type, and condition of your inventory so the lender can adjust available credit in real time.
Retailers should expect additional requirements around sales data, purchase records, and markdown activity. Quarterly balance sheets and income statements are standard, and the lender may conduct follow-up field audits during the loan term. Missing a reporting deadline or submitting inaccurate data can cut your borrowing base or, in serious cases, trigger a default.2SEC.gov. Inventory Financing Agreement Businesses without solid inventory management software should invest in one before applying; generating these reports manually on a tight schedule doesn’t hold up.
What Happens If You Default
Default gives the lender the right to seize and sell your pledged inventory. The lender takes possession and conducts a commercially reasonable sale, either privately or by public auction. If the proceeds don’t cover the outstanding balance plus liquidation costs, you’re generally on the hook for the deficiency. And if you signed a personal guarantee, the lender can pursue your personal assets for whatever the inventory sale didn’t cover.
The practical fallout goes beyond losing stock. A default and repossession make it very difficult to secure business financing afterward. Your business also faces immediate operational disruption: no inventory means no revenue, which means no way to cover other obligations. This is where inventory financing carries more risk than a standard business loan. The collateral is also the thing you need to generate income. Borrowers who see trouble coming are usually better off negotiating modified terms with the lender early rather than waiting for a formal default.