Selling physical products online brings about a wide array of primary costs—the main one being inventory. Instead of remaining cash-strapped due to inventory costs, savvy ecommerce businesses turn to ecommerce inventory financing, allowing them more breathing room and potential for growth.
What is inventory financing for ecommerce?
Much like any type of business financing, inventory financing is a loan, or money given to your business by a third party. In this case, the money is provided to purchase inventory.
There are some aspects of inventory financing that make it stand out from other financing options:
- It’s entirely possible to get any type of loan and simply use it to purchase inventory, but that’s not always the easiest option.
- Some modern banks and lenders specialize in inventory lending, so you often have to turn to them for the strongest terms.
- It’s likely the lender will ask you to use your inventory as collateral, to decrease their own risk.
- Depending on the loan, inventory financing can sometimes be set up as a continual cash flow source, where you technically replenish the money whenever more inventory is needed.
What’re the benefits of inventory financing for ecommerce?
What makes inventory financing so appealing?
- Increased cash flow helps reduce cash flow problems and helps you put other finances to work elsewhere in the business, like for operations, employees, and marketing.
- You strengthen your economies of scale by purchasing more inventory at once
- Businesses can withstand seasonal sales increases without selling out of their inventory.
- You don’t disappoint customers with consistently sold-out products.
- It enables you to research and invest in other product lines to expand your business, instead of remaining stagnant.
How do ecommerce businesses get funding?
Landing inventory financing requires the proper paperwork, and to walk through the right steps.
Before applying for an inventory loan, compile these documents:
- Profit and loss statements for more than 2 years
- Lists of all ongoing inventory and their cost breakdowns
- Your balance sheets
- All tax returns from at least 2 years ago
- Your sales projections for the next 2+ years
After that, it’s time to walk through the process of obtaining inventory financing, while also managing the money and paying it back.
Here’s a timeline of what to expect:
- Vet loan types and lenders: Consider everything from payback structures to the amount of money you can get. Hold interviews with lenders to understand what’s needed from you, and how they’ve historically handled similar loans.
- Complete and submit your application: The application varies based on the lender, but you generally must submit the documents listed from the previous section, while also filling out the required paperwork. Many lenders have started to use direct integrations into ecommerce platforms to streamline the process and extract precise sales data.
- Accept the loan and put it towards inventory costs: Lenders either send the money to your bank account or to your manufacturer/supplier. It’s also possible, but not as common, to receive installments as inventory needs evolve into the future.
- Complete your repayments: Be sure to pay back your loans as agreed upon, whether that’s on a monthly basis or determined by variable sales. Remember to always understand if you can handle a particular payment method (with interest) before signing on for an inventory loan.
What’re the types of ecommerce inventory financing options?
Lenders vary on the types of inventory loans they give out. Read below to understand which one is right to fund inventory for your ecommerce business.
A standard inventory loan:
- Requires you to put up inventory (your products) as collateral
- Offers less risk to the lender
- Makes sense for companies that must pay suppliers even though cashflow is tight
- Works well when brands experience seasonal shortages or increased demands
- Generally has shorter repayment periods, meaning you’ll probably pay increments on a monthly or weekly basis, and without an extremely long term
- Sometimes can be paid back in a lump sum
- Typically have lower interest rates
Inventory Line of Credit
An inventory line of credit:
- Works similar to a credit card, with access to ongoing, as-needed cash
- Has a limit, which is the maximum amount of accessible cash before you must pay it back
- Is advantageous when brands have working capital shortages or lots of inventory turnover, so they can decide to only grab funds during busy times, then repay as quickly as possible
- Has a term, which may end one or two years into the future
- Is revolving, meaning if you pay back the line of credit, you’re able to access the entire limit, as long as the term hasn’t ended
- Usually has much higher interest rates
- Often requires inventory as collateral
Merchant Cash Advance (Revenue-Based Financing)
A merchant cash advance, or revenue-based financing:
- Is less like a loan and more like a trade, where the lender receives a percentage of your future sales in exchange for a cash advance
- Can take less than a day to get approved
- Lets the lenders take monthly, weekly, or even daily fees based on your sales
- Usually doesn’t require a personal guarantee, collateral, or a credit check
- Leans more on requirements like a minimum amount of time in business, several profitable months/years, and minimum revenue numbers
- Almost always requires that you allow the lender to link their software to your online store for tracking and taking fees
- Can be given out on an ongoing basis, creating somewhat of an “endless” supply of cash
- Works well for younger brands, or those that need a consistent flow of ecommerce inventory financing without any of the usual hoops to jump through
Debt Financing (Bank Loans)
- Is the more traditional type of bank loan
- Offers fixed rates and terms
- Doesn’t usually provide as much specialized support/terms for ecommerce
- Provides a stable, reliable way to obtain money for inventory
- Ensures your interest fees remain lower, and that you don’t have to give a percentage of sales
- Usually comes in a lump sum, meaning there are no replenishments, or options to revitalize a credit line
- Is usually paid back in smaller segments each month, and drawn out over a longer period of time
- Is when you sell outstanding invoices/sales to a factoring company, who then advances you a certain amount of cash, often up to 85% of the invoice value
- Turns over the payment retrieval to the factoring company, who collects payment from clients and customers
- Is considered an alternative to traditional inventory financing methods
- Works well for small to mid-sized online stores, especially if you can’t produce a long credit, banking, or sales history to get a loan
- Is often desirable since you incur no debt and don’t have to worry about making monthly payments with interest
- Has an extra “brokerage” fee after all invoices have been paid
- Works well if your brand has landed large orders but has no way of fulfilling them, and you’re unable to get a regular loan due to how long it takes or because you don’t qualify
- Functions like any cash advance or credit line, except it’s done with your supplier, who extends payment terms and provides advances for purchase orders
- Often gets managed by a supply chain financing company, who partners with suppliers and serves as an intermediary
- Works best for small and mid-sized online stores
- Generally has requirements like minimum annual revenues, accurate financial statements, minimum operating years, and a credit history
- Commonly requires product liability insurance
- Is straightforward to implement and makes for smooth communications between you and the supplier—especially since the supplier knows they’re getting paid
- Can benefit brands that require ecommerce inventory financing on an “as-needed basis”.
What is the best way to finance inventory?
That depends on your needs:
- If you have a quick inventory turnover, or deal with seasonal shortages, you’re often best off taking out an inventory loan.
- Inventory lines of credit and supplier financing make sense for less regular financing needs—like if you only want to take out some money to fulfill orders, then pay it all back as fast as possible.
- If you require cash quickly, and have a longer inventory turnover, using a merchant cash advance option, like Clearco or Wayflyer, works well. They’re also great for fledgling businesses that can prove some sort of recent financial success.
- Debt financing is for businesses with the need for a lump sum, traditional loan.
- Consider factoring if you’re not keen, or able, to get a regular inventory loan, but must fulfill large orders.
Read this article to learn about more alternative ways to get funding for your ecommerce business.