Inventory financing is meant to help distributors secure funds to order new stock when needed, capitalize on supplier discounts, stock up before peak seasons, or expand into new product lines.
However, distributors often struggle to secure inventory financing from large banks and other traditional lenders. That’s because these lenders require borrowers to be in near-perfect condition to qualify.
You typically need several years of operating history, strong credit, healthy profit margins, large down payments, cash reserves, and no previous judgments or liens. As a result, only about 13% of businesses qualify for bank loans.
Additionally, evaluating and underwriting all these requirements can take up to 90 days, making traditional bank loans unfeasible for distributors looking to stock up quickly.
Because of these limitations, more distributors are turning to revenue-based financing. These financing products are easier and faster to obtain because providers evaluate applications primarily on your business’s revenue, rather than the long list of criteria banks require.
In most cases, meeting a minimum monthly revenue threshold is the main qualification.
In this article, we’ll go over how you can secure fast revenue-based inventory financing for your distribution business and what questions to ask yourself when comparing and choosing offers.
Submit four months of bank statements showing your business’s revenue and we’ll send you inventory financing offers that can be funded as early as today or tomorrow.
What Are the Requirements to Get Inventory Financing?
The eligibility requirements for inventory financing depend on both the lender you’re applying with and the type of financing you’re seeking.
As we mentioned above, revenue-based financing typically has the easiest and most straightforward requirements because it focuses primarily on your business revenue. You don’t have to worry about collateral, cash reserves, profit margins, tax returns, or supplier liens.
For example, to qualify for inventory financing with Redline Capital, you need:
- A minimum of $30,000 monthly revenue.
- A business operation history of 12 months.
- A business registered in the U.S.
As a result, over 80% of the businesses that approach us get approved, compared with banks’ approval rate of just 13%.
Additionally, revenue-based financing solutions can offer larger funding amounts than most banks because it doesn’t limit you based on credit score, cash reserves, or collateral. Banks typically extend up to 50% of your monthly revenue as a loan, while revenue-based financing can regularly do up to 200%.
Compare revenue-based financing’s eligibility requirements to those of most banks. To get an inventory loan, businesses need:
- A credit score of 720 or more
- Large profit margins
- Several years in business
- Personal guarantees, such as real estate, bank accounts, or future sales
- Cash reserves worth three months of operating expenses
- Significant short-term growth
- Debt-to-income ratios under 35%
- Detailed systems to track inventory, including how it’s stored
- To be current on all tax and 941 responsibilities
- To have no supplier liens
This makes it extremely difficult for most distributors and wholesalers to qualify.
The deeper issue with all these requirements is that banks are rarely quick to deliver a clear yes or no. Problems often surface two or three months into underwriting, and loans can be rejected right before funding. When that happens, you’re forced to start the process all over again with another bank.
How to Apply for Inventory Financing & What Paperwork to Prepare
The process of applying for inventory financing varies greatly from lender to lender.
At Redline Capital, our application and approval process is simple and can be completed in a matter of minutes:
- Fill out our short online application form and submit four months of bank statements. This is the only paperwork we ask for.
- Our underwriters run a soft credit check (which does not impact your credit score) and review your application. They determine which products you qualify for and how much financing we can extend.
- We send you multiple offers within a few hours. Each offer outlines your financing amount, rates, weekly or monthly payments, term length, and origination fees. We move quickly because we don’t require extensive documentation.
- Let us know which offer you prefer and receive funds immediately. The entire loan process typically takes 24–48 hours.
With large banks and more traditional financing companies, the process is much more complicated.
First, you need to schedule an appointment to speak with a loan officer. You can do this in person or over the phone. Typically, you need to answer questions about your business, why you need financing, and how you plan to repay it.
To start your application, you need to submit a series of documents, including financial records, a list of business debt, profit-and-loss statements, balance sheets, two years’ worth of tax returns, and proof of cash reserves.
For inventory financing, you also need to provide inventory records, historical sales reports, and projected future sales. Some banks may ask for documentation showing you have an inventory management system for tracking and forecasting inventory levels, sales, and customer demand.
Once you’ve submitted all these documents, the bank then begins underwriting, which takes 60 to 90 days.
4 Common Types of Inventory Financing Products
Some of the inventory financing products we offer include:
- Working capital loans: These short-term business loans provide quick funding that distributors can use to purchase inventory. We offer loans up to twice your monthly revenue, typically repaid over 6 to 24 months. These loans are a quick option to provide the funds needed to maintain adequate inventory levels to meet demand, especially during seasonal peaks.
- Term loan: These business loans cover large amounts repaid over a longer period, typically 1 to 3 years. These loans are good options for wholesale businesses or retailers with fluctuating cash flow, seasonal demand, or a need to buy large amounts of stock in a short period.
- Inventory lines of credit: Unlike an upfront lump-sum loan, a line of credit enables businesses to access funds as needed, offering greater flexibility in managing seasonal stock requirements and accounts receivable. Rates and fees are usually only charged on the amount used.
- SBA loans (Small Business Administration): These are government-backed loans for small businesses. You can use SBA loans like the 7(a) Loan Program and the SBA Microloan Program for a variety of business needs, including purchasing inventory and working capital. Because the government secures these loans, they often have lower interest rates, however, they can take longer to fund.
How to Choose the Right Inventory Financing Offer for Your Distribution Business
Choosing the right offer can be the difference between securing an affordable loan and getting locked into one with a high interest rate. Here are five questions to help you evaluate lending offers:
1. Can I get the amount to cover the full inventory purchase price?
Banks typically don’t cover the full cost of the inventory you want to buy because they are very risk-averse lenders.
The exact amount depends on the bank, the type of inventory, and your business’s creditworthiness. Most loan offers only cover 70% to 90% of the purchase price, but it could be much lower. For example, if the stock includes perishable items with a short shelf life, banks would generally require a larger down payment.
In contrast, at Redline Capital, most of our clients qualify for 100% financing.
2. How much will I have to repay?
Another important aspect to consider in an offer is how much you will have to repay. This includes rates and any additional fees, such as arrangement or processing fees.
With Redline Capital, you can secure better rates and terms for your distribution or wholesale business than you would when applying with other financing providers.
As a broker, we have strong relationships with top lenders, including OnDeck, Credibility, and Rapid Finance. Over the years, we’ve sent them hundreds of millions in loan applications, scaling their lending business. In return, they offer our applications discounted rates, larger amounts, and other benefits not available to direct applicants.
3. Does the lender offer flexible repayment terms?
Consider the flexibility of the repayment terms and whether it aligns with your business’s seasonal demands (e.g., weather, holidays, school schedules).
To help your business navigate predictable peaks and troughs, we offer flexible terms, allowing minimum or interest-only payments during slow months and larger installments during months with the highest sales. Most private lenders don’t offer this flexibility.
Read more: 10 Best Same-Day Merchant Cash Advance Providers
4. Is the lender experienced in providing inventory financing?
Our advice is to work with a lender experienced in dealing with inventory financing for distributors.
Experienced lenders know seasonal cycles and thin margins are typical for distributors and don’t penalize them with higher rates. They also know how to evaluate different types of inventory, including raw and perishable materials, and can offer you inventory financing solutions that are specific to your situation.
In contrast, traditional banks may not be the best financing option as they are unfamiliar with the nuances of inventory financing and may lack the expertise to handle the unique valuation process.
At Redline Capital, we’ve been helping distributors for 15 years and have a deep understanding of inventory financing. As such, we won’t charge your business higher rates for industry-standard realities like seasonal revenue fluctuations or thin profit margins, as banks often do. We also understand that your business may have seasonal stock needs and can work with you to customize the repayment plan around your cash flow cycles.
5. How ethical is the lender?
Evaluate the reputation of the lender you’re partnering with.
It’s not uncommon in the lending industry to find unethical and unprofessional lenders who prioritize profit over their clients. These lenders send you expensive offers and aggressively pressure you to accept.
To avoid these low-quality lenders, read independent online reviews of previous borrowers.
At Redline Capital, we only send you transparent, genuine offers we believe are the best for you. Our staff can answer any questions you may have, but will never coerce you to accept an offer. It is entirely your decision to select the offer.
In addition, if you don’t qualify for the financing product you originally applied for, we don’t just reject your application like traditional banks do. We’ll send you offers for alternative products for which you do qualify, along with some guidance on what to do next.
Here’s what some business owners have said about our application process:
Ready to apply for inventory financing? Submit four months of bank statements and we’ll send you offers that can be funded in under 24 hours.