July 7, 2023
min read
Written by: 
Nikolaus Hilgenfeldt

What Are The Types of Inventory Financing? (With Examples)

If you are a retailer, you know that a sudden surge in demand can be both a blessing and a challenge.

While increased sales mean higher revenue, financing bulk inventory purchases can become daunting.

In such scenarios, businesses often seek financing solutions like inventory financing to navigate potential cash flow issues.

This article explores what are the types of inventory financing, how they work, its benefits and drawbacks, associated costs, and alternative options.

Let’s begin!

Understanding Inventory Financing

Inventory financing allows businesses to use inventory as collateral to secure a loan or line of credit. 


With inventory financing, you can borrow against a portion of the inventory's value, providing the liquidity you need for different situations, like:


Because inventory financing relies on your assets rather than your creditworthiness or cash flow situation, lenders can offer loans for a wide range of goods, such as:

  • Retail merchandise (beauty products, apparel, electronics, etc.),
  • Unfinished goods,
  • Materials utilized in your production process,
  • Supplies,
  • Other non-obsolete inventory. 

Lenders typically evaluate your inventory, and if it meets their criteria, you can swiftly secure a loan based on your inventory records.

In the next section, we’ll go over different types of inventory financing in detail, along with examples to help you choose the most suitable one for your business.

Types of Inventory Financing: Exploring Your Options

Regarding inventory financing, several options are available to borrowers.

1. Warehouse Financing

Warehouse financing is a common choice for manufacturers or parties closely involved in the supply chain.

With this type of financing, you must move the entire inventory, against which the advance is being extended, to a designated warehouse facility.



Let's say you own a manufacturing company that produces electronic gadgets.

You have a large inventory of finished goods ready for sale but need additional funds to support your business operations and expansion plans.

1. Evaluation and Appraisal

The financial institution assesses your inventory to determine your goods' quality and market value. 

2. Agreement and Warehouse Transfer

Once the evaluation is complete, you and the lender make a financing agreement.

As part of it, you agree to transfer your entire inventory to a warehouse facility approved by the lender and ensure that the lender has physical control over the collateral.

3. Control and Monitoring

After you move inventory to the warehouse, the financial institution gains control over the stored goods. 

They may require you to follow specific procedures for releasing inventory from the warehouse or may impose restrictions on the movement of goods to mitigate risk.

4. Financing and Advances

Based on the appraised value of your inventory, the financial institution extends a loan or line of credit.

The loan amount is typically a percentage of the appraised value, ranging from 20% to 65%. 

5. Repayment and Interest

Interest rates are typically higher than those for traditional loans due to the perceived higher risk. 

You are responsible for making regular repayments according to the agreed-upon schedule.

6. Default and Collateral

Suppose you fail to meet the repayment obligations. In that case, the lender can seize and sell the collateralized inventory to recover the outstanding amount.

2. Loan for Inventory

While inventory financing is often associated with borrowing money against the resale value of existing inventory, there are cases where businesses require capital to purchase inventory for resale in the first place.

Lenders typically use the inventory as collateral but may also require a down payment against the inventory's value.

This financing option is handy for businesses that need upfront funds to acquire inventory before generating sales revenue. 


Let’s say that you identified a high-demand product and want to stock up on inventory to meet customer demands during the upcoming holiday season.

Your company determined it needs $100,000 to purchase the desired inventory quantity. However, it currently lacks sufficient funds to make the purchase.

1. Applying for a Loan

First, you submit the necessary documentation, such as financial statements, inventory projections, and a business plan that outlines how the inventory will contribute to sales and profitability.

2. Loan Approval and Terms

Upon reviewing the application, the lender assesses the business's creditworthiness, considering its financial history, revenue projections, and industry trends.

3. Loan Amount and Collateral

In this example, let's assume that the lender offers a loan of $80,000, representing 80% of the appraised value of the inventory.

If you default on the loan, the lender can seize and sell the inventory to recover the outstanding amount.

4. Down Payment

The lender requires you to make a down payment of $20,000, representing 20% of the inventory's value. 

This down payment helps mitigate the lender's risk and demonstrates the business's commitment to the loan.

5. Purchasing Inventory

With the loan funds and the down payment, you can purchase the desired inventory from suppliers and manufacturers. 

6. Loan Repayment

You begin selling the inventory to customers, generating revenue.

Then, you use that revenue to make regular payments toward the loan, including principal and interest.

7. Completing the Loan

As you make consistent repayments, the loan balance gradually decreases.

Once you fulfill all the repayment obligations outlined in the loan agreement, the loan is fully repaid, and you retain full inventory ownership.

Pro Tip From Myos

Myos offers working capital without relying on credit history checks.

We use open data about your store to predict future product performance and determine how much we can finance your store.

Additionally, we don't require personal guarantees.

Instead, the loan is based on your inventory, keeping your personal assets separate from your business.


With purchase financing, you can finance your future orders with your manufacturer, where we take care of the deposit and balance payments for you.

How Does It Work?

Request a loan by providing the product codes and proof of sales.

Our AI evaluates the products and will send you an offer within 24-72 hours.

Once the contract is signed, payment can be made directly to you or your manufacturer.


Repayment is flexible, with a loan term of up to 24 months.

You can repay the loan early without extra costs, make a lump sum payment on the last day, or choose regular payments.

Interest is calculated on the outstanding balance, giving you control over monthly costs through repayments.

3. Loan against Inventory 

This approach involves the financier granting a short-term loan as a percentage of the value of the business's inventory.

It is also a good solution for international buyers, allowing them to access cash for covering domestic selling and operational expenses by staking the inventory as collateral.

Some financing solutions may pay suppliers directly instead of disbursing funds to the borrower.

Repayment can be structured as monthly installments or as a percentage of sales.

Example with Myos Stock Financing

Let's say you own a retail business that sells electronic gadgets. You have a substantial inventory of smartphones worth $100,000.

However, you're experiencing a temporary cash flow crunch and need immediate funds to cover operational expenses.

You approach Myos, who offers stock financing, and request a loan against your inventory.

The lender evaluates your inventory using an AI-based algorithm and determines they can provide you with a loan of up to 70% of the appraised value, which amounts to $70,000.


How Does It Work?

Upon accepting the loan offer, you sign an agreement that outlines the terms and conditions, including the repayment schedule and interest rate.


Once the loan is approved, you can use the funds to cover operational expenses, purchase additional inventory, or invest in marketing activities.

💡 Interest is consistently computed based on the remaining balance. Suppose you borrowed $70,000 from Myos and make regular monthly repayments.

Doing so will lower your monthly expenses than repaying the entire amount in one lump sum on the final day. Consequently, you can manage your monthly expenditures through your repayment schedule.

The repayment period for inventory loans is typically short-term, ranging from a few months to 2 years.

During the repayment period, you continue to sell your inventory and generate revenue.

💡 If you cannot repay within the project duration, Myos will initially communicate with you to explore options.

Extending the project by a few months can be beneficial if sales do not meet expectations.

However, suppose it is impossible to reach an agreement or continue the project, such as in insolvency. In that case, we will sell the goods to settle your debts.

4. Inventory Line of Credit

With an inventory line of credit, the lender establishes a credit limit based on the value of the inventory.

The business can withdraw cash multiple times as needed if it doesn't exceed the sanctioned limit.

The system operates similarly to credit cards, and interest is only charged on the amount withdrawn.

Typically, a small processing fee is associated with the entire facility.

In default, the financier can seize the inventory to recoup the outstanding payment.

When the line of credit expires, the total amount due is broken down for repayment, similar to a bank loan.


To understand how an Inventory Line of Credit works, consider a hypothetical example of a retail business called "XYZ Clothing Store."

1. Approval and credit limit

XYZ Clothing Store applies for an Inventory Line of Credit from a financial institution. After reviewing the store's financials, inventory value, and creditworthiness, the lender approves a credit limit of $200,000.

2. Available credit and withdrawals

With the Inventory Line of Credit established, XYZ Clothing Store can access funds up to the approved credit limit.

Let's say the store needs to purchase new inventory for the upcoming holiday season and requires $50,000.

They can withdraw that amount from their available credit, leaving them $150,000 remaining.

3. Repayment and interest

Interest is charged only on the amount withdrawn, not the entire credit limit.

If XYZ Clothing Store withdraws $50,000, they will pay interest on that specific amount. The interest rate and repayment terms are agreed upon during the initial setup of the line of credit.

4. Inventory sales and repayment

As the holiday season progresses, XYZ Clothing Store sells the newly purchased inventory and generates revenue. A portion of that revenue is allocated to repaying the outstanding balance on the Inventory Line of Credit. Let's say they give $10,000 from their sales revenue towards repayment.

5. Available credit replenishment

With the outstanding balance reduced by $10,000, the available credit increases to $160,000 ($150,000 + $10,000). They can withdraw more funds up to the remaining credit limit if necessary.

6. Ongoing cycle

XYZ Clothing Store can repeat this cycle of inventory purchases, sales, and repayments as long as they stay within the credit limit and meet the minimum repayment requirements.

Pros and Cons of Inventory Financing

Like any financing option, inventory financing has advantages and disadvantages:

✅ There are no restrictions on how you can use your funds.

Simple application process and faster approval times.

✅ It solely relies on your inventory as collateral.

✅ It provides more funding opportunities for businesses with limited credit history.

✅ Inventory lines of credit provide a recurring source of funds that can be accessed as needed.

❌ Inventory value fluctuations pose a risk to both parties during market downturns or product obsolescence.

❌ Insufficient loan-to-value ratio may necessitate supplementary financing sources.

❌ To minimize default risks, creditors may enforce automatic repayment.

❌ Creditors may impose "loan covenants," such as mandating insurance on collateralized inventory or restricting the use of borrowed funds for inventory purchases.

❌ Lenders often conduct time-consuming due diligence procedures (inspecting warehouse facilities, testing inventory systems, etc.).

Costs and Alternatives

The cost of inventory financing varies depending on the lender, loan terms, and the borrower's creditworthiness.

Standard costs associated with inventory financing include interest charges, origination fees, and possible storage and appraisal fees.

In addition to inventory financing, businesses can explore alternative financing options such as:


We hope these insights help you assess if inventory funding is the right choice for your business expansion.

Still, when securing your company's success and maintaining a healthy cash flow, partnering with a reliable ally is crucial.

Why choose Myos?

We specialize in helping business owners expand their enterprises.

With us, retailers can increase their sales and profits by placing larger orders, introducing new products to the market, and enhancing their advertising efforts.


Supercharge your business with Myos financing today! Get the working capital you need to grow and thrive. 

Sign up now and get the free, non-binding offer. 

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