Should you use a loan to buy inventory?

Taking out a loan to buy inventory can make a lot of sense for businesses, especially when sales are picking up or you expect a rush in demand. Instead of dipping into your everyday funds, inventory financing lets you keep your shelves stocked and your business running smoothly. This way, you don’t have to worry about running low on cash for other important expenses while making sure you’re ready to meet customer needs.

Consider inventory loans when purchasing opportunities arise, such as bulk discounts, seasonal stock requirements, or new product launches. These loans enable businesses to capitalise on favourable terms whilst preserving cash for operational expenses.

There are some clear upsides to this kind of borrowing:

• You don’t have to dip into your working capital, so you can keep covering your regular expenses.
• Buying in bulk becomes easier, which sometimes means getting better deals from suppliers.
• If there’s a sudden spike in demand, you’re ready to respond quickly.
• You can prepare for busy seasons without putting a strain on your cash flow.

But it’s not all positive—there are some real risks to consider:

• Interest payments will eat into your profits, so it’s important to factor those costs in.
• If you can’t sell the inventory, you’re left with unsold goods and still have to repay the loan.
• Demand can change unexpectedly, leaving you with excess stock and outstanding debt.

Before taking out an inventory loan, it’s wise to look at how quickly you usually sell your stock.

Businesses with steady sales and loyal customers are generally better suited to this type of financing.