Inventory Loans: When Your Cash is in Your Inventory
- Howard Abrahams
- 6 days ago
- 2 min read
Inventory loans can unlock working capital, but the path to funding must be managed very carefully to ensure success.
When Inventory Has Value, but Cash Is Still Tight
For many businesses, inventory is one of the largest assets on the balance sheet. On paper, it represents value and future revenue. In day-to-day operations, however, that value is often locked up on shelves or in warehouses.
An inventory loan is a form of financing where inventory serves as the primary collateral. These loans are most commonly used by distributors, wholesalers, importers, and certain e-commerce businesses.
Why inventory loans are hard to obtain
From a lender’s perspective, inventory is one of the more difficult assets to underwrite. Inventory values can change quickly. It may be that the very reason a business is looking to borrow against their inventory is because the inventory is obsolete or not “turning” fast enough.
Lenders typically focus on several concerns:
Valuation swings: Demand, seasonality, and pricing pressure.
Obsolescence risk: Products can become outdated, damaged, or unsellable.
Shrinkage and loss: Theft, spoilage, or handling issues reduce collateral value.
Liquidation limits: Inventory often sells at a discount in forced-sale scenarios.
Because of these risks, many traditional banks either avoid inventory-only loans or impose strict controls.
How the Process Typically Works
When inventory financing is available, the process is structured and documentation heavy. Borrowers should expect:
Detailed inventory reporting: SKU-level lists, aging, turnover data, and storage locations.
Independent valuation: Field exams or third-party appraisals to confirm condition and marketability.
Borrowing base calculations: Advance rates are applied to eligible inventory. Many lenders fall in a 50% to 60% range, depending on inventory type, turnover, concentration, and how easily the goods can be liquidated.
Ongoing oversight: Monthly reporting, audits, and compliance requirements. Lenders may also exclude certain inventory categories and apply reserves when calculating availability.
This level of oversight helps lenders manage risk, but it also means inventory-only loans are rarely fast or simple.
Pros and Cons of Inventory Loans
Advantages
Access to capital
Supports seasonal inventory builds and growth cycles
Availability can scale with inventory levels
Trade-Offs
Lower advance rates than other asset classes
Increased reporting and lender oversight
Limited usefulness for slow-moving inventory
Slow process due to the need for appraisals
Connect With Morewood Funding
If a bank has declined an inventory-only loan, there may be other funding options available. Morewood Funding works with lenders who understand inventory risk and know how to structure financing that aligns with real-world operations. If you advise or manage a business considering funding options, please contact us at:
Call: 917-561-7074
Email: howard@morewoodfunding.com
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