Borrowing money to pay for stock: inventory finance, credit cards, loans and more

We explore the options that are available to help you cover the costs of your stock as well as the pros and cons

Stock is essential for your business, but you’ll likely have different needs at different times of year in line with cash flow and demand for certain items of stock.

At other times, you’ll want to take advantage of a deal, think sell-out products or discounts, and need a bit of extra dosh.

Here, we go over a few different financing options for stock to help you suss out which is the best for your small business.

Business loans

Entrepreneurs often turn to business loans when they need cash for stock and it’s more for new stock or to maintain buffer stock. A fixed term loan is best as they have lower interest payments. What’s more, repayments can be made between one month and several years.

“When buying stock, it’s crucial that businesses react swiftly to changes in the market, so the shorter approval time of short-term loans can prove useful,” Joost Versteeg, head of product strategy at small business lender iwoca, tells Small Business. “Better still, the best short-term loans do not lock borrowers into payments, meaning that if your business sees high revenue and you can afford to pay off a loan sooner than expected, there’s no small print forcing you to continue paying instalments over a long period – or pay a fee to settle up early.”

Pros

  • Short-term loans allow businesses to act quickly
  • A range of repayment periods
  • Plenty of options available

Cons

  • Some loans are only open to more established businesses
  • Likely to require a credit check
  • Applications can take longer than other financing methods

Credit facilities

The difference between loans and credit facilities is that when borrowing from a credit facility, businesses have flexibility in when cash is drawn and repaid, and borrowers don’t need to submit multiple applications to receive long-term funding. “That is to say, when small businesses need to act quickly, such as when buying stock to react to market volatility, a pot of money with a credit limit is readily available to them – no further applications needed,” said Versteeg.

Credit facilities are better for small businesses who have unpredictable cash flow. Borrowers pay interest only when they draw from the facility, instead of a regular standing payment like you’d see on a personal loan.

Pros

  • Only need to apply once
  • More flexibility
  • Suitable for less stable cash flow

Cons

  • High interest rate charges
  • Terms can change at any time
  • A number of fees on top of interest

Revenue-based finance

Revenue-based finance gives companies capital in exchange for a percentage of their future revenue. Advances are approved on the proviso that the company will repay a certain amount each month.

Merchant cash advances

Merchant cash advances are popular for retail, hospitality and leisure businesses. You as a business will pay back as a percentage of card payments through a card terminal. It can be easier to access than other forms of finance making them useful for businesses who have few to no assets. They’re also good for those who need capital for growth and have a limited credit score as there’s no need for a credit check or detailed look into your bank accounts.

How it works is that the lender liaises with your terminal provider to determine repayments based on your takings. Basically, it flexes to how much money you’re making. This means you pay back less if you’ve had something of a quieter month. How much you can borrow will depend on a few factors, such as your average turnover.

Versteeg said that the best products use open banking technology to use your business’ bank transaction data, instead of just card transactions, thus accounting for the multiple revenue streams you may have. This will be particularly useful if you sell online on multiple platforms. 

“The revenue-based loan also offers flexibility to businesses affected by continued economic uncertainty, with supply chain and staffing issues making it difficult for businesses to plan. Moreover, it can drive growth for scale-ups whose revenue growth may come months after finance is secured,” he added. 

Pros

  • Easier to access than other financing options
  • No credit check
  • Pay back less if you have a quieter period

Cons

  • Difficult if majority of payments aren’t taken using a card terminal
  • If you don’t get much revenue, you won’t be able to borrow as much
  • Unsuitable for pre-revenue businesses

Credit cards

Credit cards can be beneficial for newer businesses as they can get a credit history which could give them a leg up for future financing.  

You’re likely to have a credit card fee but some providers dish out rewards like cashback. Make your minimum repayments to avoid additional fees as well as damage to your credit rating. It can be flexible too, with the option to switch your balance to a new credit card or have a balance on multiple cards. Be aware that there are different rates and limits on different credit cards.

Credit cards are a method of unsecured lending, so you’ll have to make sure your business is trustworthy. In other words, get ready for a hefty credit check.  

Pros

  • Easy to access with lots of options
  • Rewards on some cards
  • Build business credit

Cons

  • Multiple fees
  • Difficult for unpredictable cash flow as need to make repayments
  • Need a personal guarantee, so can affect credit score if you miss a repayment

Stock finance/inventory finance

Stock finance is an alternative finance method which is not as well-known. It’s good for paying suppliers for stock. It’s flexible, giving quick payments to supplier and allowing you to buy larger quantities of goods. A funding limit can be set and you can purchase goods up to this limit at your own discretion. In order to access this finance you’ll need accounts, forecasts, stock inventory and customer records. Read more on our sister website, Growth Business.

Stock loans

Stock loans are for businesses who need to pay their suppliers directly. This can be for goods regulation, clients needing to pay for goods on the spot (say, at an auction) or preserve long-standing client relationships.

You can also take out loans against existing stock as long as the stock is saleable. The stock needs to be in a position where it can be inspected and it’s expected to be sold within a relatively short time – two months, for example.

Pros

  • Pay suppliers directly and quickly
  • More likely to be open to new businesses
  • Businesses don’t need to put up personal assets to access finance

Cons

  • Need a lot of documentation to set up
  • Admin is costly for the lender which is passed on to the borrower in fees
  • Lenders may not advance all of the money requested

Wholesale stock finance

Wholesale stock finance is more for larger companies. It allows you to raise working capital against the stock owned by your business via a revolving credit facility.

Wholesale stock finance provides convenient access to a credit line throughout your operating cycle. It offers the reassurance of certainty of funding up to an agreed limit.

Pros

  • Flexible

Cons

  • More suited to larger businesses
  • Can be more expensive than traditional loans

Revolving credit

With revolving credit you can borrow money, pay it back and take it out again for the agreed period of the revolving credit limit’s term. Get credit up to a set limit – once paid back in full, the money can be borrowed again. You’ll only pay interest on what is used.

Pros

  • Pay interest only when you use it
  • Access finance quickly
  • No early repayment fees

Cons

  • Lower credit limit, so not practical for a larger loan
  • A personal guarantee may be required
  • Higher interest compared to traditional loans

Inventory monetisation

This is a relatively new concept to the UK, but inventory monetisation allows companies to unlock working capital based on the value of their inventory without incurring debt.  

Nicola Bonini is the head of origination at Supply@Me, which facilitates the selling of non-perishable goods to an inventory lender, such as a bank, and sells it back at a later date.

They’ll do this through a rigorous due diligence process, looking at your sales history of that inventory, how the inventory has performed, how it’s turned, how often it’s sold and how often it comes in and out of the warehouse.   

She uses the example of tinned tomatoes. They are canned at a certain point in time and then they are shipped over to the UK to sit in a warehouse, but the supermarket, for instance, doesn’t want all those cans of tomatoes in one go. Your business can then allow the corporate to get the value out of that stock before it’s sold on to the third party.

“We will be covered by [your company’s] insurance policy. We make sure that we’ve got all the right requirements in place for us to be able to access that inventory if we needed to,” she told Small Business.

“It’s really pertinent at the moment with all the supply chain issues and the movement away from ‘just in time’ to ‘just in case’,” she said. “Then there’s Brexit – a lot of businesses have decided that they need to have warehouses in Europe now whereas previously they might not have done.”

Pros

  • Unlock working capital without incurring debt
  • Supports businesses with warehouses in other parts of the world
  • Beneficial for businesses that sell seasonal goods

Cons

  • Firm will need access to your warehouse if necessary
  • Doesn’t cover stock with a short shelf-life
  • Due diligence is rigorous

What should I consider when looking for finance options?

Joost Versteeg outlines what considerations you need to make when assessing your finance options.

Business needs

First, it’s important to assess what exactly your business needs. If a small business is looking to escape a cash flow crunch or to bridge a gap quickly, a short-term business loan should do the trick. Bear in mind that if your cash flow is unpredictable, you’ll need to find a loan that has no fees for repaying early and only charges you for each day that you hold the loan money. Short-term flexible business loans that allow you to repay early and top up for free, are often the best route for cash flow support, but consider that not all lenders provide these flexible options and you need to consider any additional fees. 

Flexibility

Flexibility is often the distinguishing feature between borrowing options. Small businesses, by their very nature, are more likely to experience variations in their cash flow than larger companies. Having the option of an easily accessible pot of funding in the form of a credit facility suits businesses that foresee needing money on short notice, but it’s important to note that while credit facilities offer flexible capital, their rates of interest can be, on average, higher than those of regular loans. 

Current resources

Finally, make sure that your chosen financing option is suited to your business’ current resources. Applying for funding with some providers can be long-winded and consume your resources. Double check with your funding provider on the:

  • Speed of the decision: how quickly do you need the money? Depending on your provider and their products, you may be able to get your loan approved in just minutes or hours, but some providers may take longer.
  • Administrative requirements: are you in a position to complete the required paperwork? Keep an eye out for providers that allow you to apply for your funding entirely online as it may save your time and resources.
  • Management of your account once you’re a customer: will your lender offer you an account manager? It’s helpful to have a point of contact with your provider who looks exclusively at your account and supports you along the way.

Where can I go for more information on borrowing to finance stock?

Have a word with an Independent financial adviser (IFA) to go over which options are best for you.

Check out the links below for more about the topics in this article:

Best small business loans in the UK

Secured vs unsecured business loans

Business credit cards: how to use them for steady cash flow

Related Topics

Business Finance