How does inventory financing work?

Inventory financing is a type of funding that helps businesses purchase stock or inventory to meet customer demand. Here's how it typically works:

• Businesses first apply to financing institutions to set up inventory financing facilities. Approval decisions are based on the business’s financial health, collateral assets, and repayment capabilities.
• Once approved, instead of receiving a one-time loan amount, businesses are given revolving credit lines that can be drawn down. These credit facilities are tied directly to the value of inventory that businesses purchase.
• When businesses need to buy new inventory, they can draw down predetermined percentages of their purchase value from the credit line.
• The new inventory purchased serves as collateral for the credit line. Legal ownership is tied to the inventory itself until businesses sell it and repay draws from the credit facility.
• As companies sell off existing inventory to customers, they free up the tied-up collateral. This allows them to continually borrow against the credit line as room becomes available to finance replenishing their stock.
• Repayment terms require businesses to repay the credit line draws they took over fixed periods of time, for example, 180 days. This gives them time to turn over inventory into sales. Interest and fees apply for the use of credit line funds.