Inventory Finance

Inventory is the lifeblood of many businesses, and in Australia, the previous lockdowns have enlightened entrepreneurs to be more proactive about it. Recent surveys show that SMEs are moving towards a ‘Just-In-Case’ delivery method when planning for inventory. While the goal is to be as efficient and reliable as possible, most SMEs may experience a…

Article published by

Darin Hindmarsh

July 2, 2025

While the goal is to be as efficient and reliable as possible, most SMEs may experience a funding gap. This is where inventory finance comes in handy. As managing inventory to ensure optimal stock levels comes with financial challenges, inventory finance is one solution to balance supply and demand for the company’s growth.

In this article, we delve into the mechanics of inventory finance, explore what types of inventories can be financed, in which industries, and if it is the best type of loan for your business.

What is inventory finance?

Inventory finance, also known as inventory financing or stock finance, is a specialized form of financing that enables businesses to leverage their existing inventory as collateral to secure funds. This financing option is particularly beneficial for businesses that face seasonal fluctuations, need to stock up on inventory for peak demand periods or require working capital to optimize their inventory management.

Australian warehouse occupiers are much more agile nowadays, with approximately 30% more inventory compared to pre-pandemic levels. Unsurprisingly, the funding gap is felt by small businesses. About a third of businesses in one survey said the delivery of services or products had been affected by an inability to secure credit.

Inventory signifies reliability; therefore, any materials, work-in-process products, or finished goods for retail should always be available if you want to satisfy customer demand. Generally, the turnover of this inventory represents the business’ revenue, which means the more efficiently you move inventory, the better for your bottom line. In short, inventory is cash.

How does inventory finance work?

Inventory finance is a form of line of credit loan where you can relay to a lender the purchase of stock for the business. The lender pays the manufacturer directly, and you in turn, agree to repay the lender within a given period.

Lenders usually allow a couple of months for your business to settle the loan or agree for repayment when the inventory sells. Loan terms would range from $100,000 to millions. The stock itself becomes the collateral in this financing system.

These are the steps involved in inventory finance:

Inventory assessment: Businesses provide detailed information about their existing inventory, including its value, turnover rate, and quality.

Lender evaluation: Lenders assess the quality of the inventory, its market value, and the business’s ability to manage and sell the inventory.

Funds disbursement: Based on the assessment, the lender advances a percentage of the inventory’s appraised value. This provides the business with immediate working capital. Banks provide a credit card that is limited to the purchase of specified goods.

Repayment: As the business sells the inventory, it repays the lender. The repayment amount includes the principal amount borrowed and any associated fees. A shorter loan term may mean higher interest rates, but paying interest over a longer period will potentially chip away your monthly profits.

Inventory finance is a strategic choice. It enables your business your company to address inventory-related challenges and costs without tying up capital in unsold stock. By unlocking the value of their inventory, businesses can optimize cash flow, minimize the risk of overstocking, and enhance their ability to meet customer demand.

What are advantages of inventory finance?

Working capital – Inventory finance provides immediate working capital to businesses, allowing them to manage day-to-day expenses and invest in growth opportunities.

Flexible financing – Businesses can access funds without adding to their debt burden, as inventory serves as collateral. You have the capital to purchase stock even if you’ve already borrowed against your property assets for other loans.

Optimized inventory management – Businesses can maintain optimal inventory levels, preventing overstocking or stockouts that can impact operations.

Faster international transaction – Dealers and retailers that order supplies from overseas usually experience delays between paying and receiving. Inventory finance addresses this bottleneck by speeding up payments in international trades.

Seasonal support – Inventory finance is particularly advantageous for businesses that experience seasonal demand fluctuations, as it helps them secure funds during peak periods.

Who qualifies for inventory finance?

Inventory finance involves a stringent application process and can be challenging for businesses to secure. Lenders look extensively at your business’ financial history but also inventory management records. This is understandable, as they use the stock as security for the loan. They must vet the value and marketability of the inventory to proceed with financing it.

Even without collateral, your business must meet these criteria for inventory financing:

Lenders require the business to have a minimum of two years being operational in your respective industry.
Inventory must be product-based, with the value of stock easily estimated and highly marketable within your sector. Examples include cars, IT equipment, fashion retail goods, raw materials, etc.
You must present annual earnings. Lenders will require varying minimum eligibility for this, depending on the loan amount.
Credit defaults and any existing debts are assessed, as these could signify inability to take on the inventory finance.
Lenders also consider your industry. If the market is volatile or unpredictable, the application might be rejected. On the other hand, even if you have a seasonal surge in demand, if the industry is predictable and reliable, then your financing will likely be approved.

What documents do lenders look for?

Balance sheets – Accurate financial records should cover at least two financial years

Income statements – Precise profit and loss statements spanning the current year and backtracking at least two financial years

Business tax returns – A historical revenue trajectory of the business

Personal tax returns – Necessary for sole traders or entrepreneurs that are relatively new to the industry

Inventory records – A historical record of inventory turnover rate, existing items in possession, and inventory management practices

Sales projections – Well-structured forecasts assist lenders in gauging your business’ feasibility in getting inventory financing