Inventory financing is similar to accounts receivable financing, except the business's current inventory is used as collateral for the secured loan. You can anticipate a very conservative valuation of your inventory and a maximum loan amount that is somewhat less than 100 percent of the lender's valuation figure. Average lender discounting would allow lending of up to 60 percent to 80 percent of the value of your ready-to-go retail inventory. A manufacturer's inventory, consisting of component parts and other unfinished materials, might be only 30 percent. The key factor is the merchantability of the inventory — how quickly and for how much money could the inventory be sold.
The loans are typically short-term and the interest rates are similar to those for accounts receivable lending. The most common use of inventory financing is for the purchase of new inventory, especially when an upcoming season requires that you keep additional inventory in stock.