Stock finance: borrowing against inventory you hold or need to buy

Lending against stock you hold

The lender advances a percentage of the value of inventory already in your warehouse, usually as a revolving limit that rises and falls with stock levels. It is most often provided as part of an asset-based lending facility, alongside invoice finance, because a lender that can see the goods and the invoices they turn into has a clearer view of the whole cycle. The British Business Bank's explainer on asset-based lending sets out the model.

Funding new stock purchases

The lender pays for stock you are about to buy and you repay once it sells or after an agreed period. When the supplier is overseas and the lender pays against shipping documents, this becomes trade finance. When the need is simply "more money to buy more stock", a working capital loan or a revolving credit facility often does the same job with less monitoring.

A stock lender asks one question: if the business failed, what would these goods fetch, quickly, through an agent or auction, after costs? That figure, the net orderly liquidation value, is usually well below cost and far below retail price. The advance is a proportion of it.

Lenders then remove stock they cannot rely on, which is why the facility is often smaller than owners expect:

• Goods under retention of title. If your supplier's terms say it owns the goods until paid, a lender cannot count them. This is common in builders' merchants, electrical wholesale and steel stockholding.
• Slow-moving and obsolete lines. Stock that has not moved for many months is often excluded entirely.
• Work in progress. Part-made goods are hard to sell to anyone else.
• Perishable, seasonal or fashion stock that loses value quickly.
• Stock in transit, at third-party sites or held on consignment, unless the lender can confirm its location and ownership.
• Highly specialised or branded items that only one buyer would want.

What remains, the eligible stock, forms the borrowing base. Most facilities require a regular stock report and periodic audits or site visits to check the figures.

Stock turn is cost of sales divided by average stock held; stock days is 365 divided by stock turn. The higher the turn, the less cash inventory ties up and the more comfortable a lender is that it can be sold.

Illustration only, with round hypothetical numbers; not a quote or offer. A garden products wholesaler has cost of sales of £2.4 million and holds an average of £400,000 of stock, so it turns stock six times a year and goods sit for around 60 days. To meet spring demand it must lift stock to £700,000 by February. The extra £300,000 is spent in winter and returned in April to June. A seasonal stock or revolving facility sized to that peak, and reducing as goods sell, fits the pattern; a five-year term loan for the same amount would leave the business paying interest on money it does not need for most of the year.

• Wholesale and distribution: bulk buying to secure supplier discounts, usually combined with invoice finance on trade customers. See wholesale business loans.
• Retail: building stock ahead of Christmas or a summer season, then repaying as takings arrive. See retail business loans. High-value, slow-turning stock such as fine jewellery is valued very differently; see finance for jewellers.
• Manufacturing: raw materials and finished goods can be funded, work in progress rarely.
• Motor trade: dealers use dedicated stocking plans that fund each vehicle and are repaid when it is sold; see motor trade finance.
• Importers: goods held in a customs warehouse can have duty and import VAT suspended until they are released, which reduces the cash needed alongside the stock itself. HMRC explains how to use a customs warehouse.

Online sellers have a particular problem: their stock often sits in a marketplace fulfilment centre, spread across locations the seller does not control, which makes traditional stock lending difficult. Instead, most ecommerce inventory is funded against the sales it produces:

• Revenue-based finance advances a sum repaid as a share of marketplace or website takings, which suits the peak-and-trough shape of online trade.
• Some lenders connect directly to marketplace and payment accounts to assess sales history instead of relying on filed accounts.
• Short-term loans can fund a stock order placed months before a peak, repaid once the season's sales settle.

Lenders will look at sell-through rates, returns, account health on each platform and how dependent the business is on one marketplace. Our page on ecommerce business loans covers the wider options.

Stock finance suits businesses that hold physical, saleable goods and can prove what they hold, where it is and how fast it sells. Wholesalers, distributors, manufacturers with raw materials and finished goods, and established retailers are the typical borrowers. Lenders want a stock system that produces reliable reports by line, a gross margin that leaves room to clear goods at a discount, and enough trading history to show the seasonal pattern. Dedicated stock lines are usually limited companies with sizeable inventories, often alongside debtors. Businesses whose goods are mostly under retention of title, perishable or made to order may find little stock counts, and are often better served by the alternatives above.

A stock-based facility is normally secured by a debenture giving the lender a charge over the stock, and usually over the business's other assets too, because goods that are constantly bought and sold are held under a floating rather than a fixed charge. Our guide to fixed and floating charges explains the difference. Lenders also typically ask for stock insurance with their interest noted, a personal guarantee from the directors and, if a bank already holds a debenture, a deed of priority agreeing who ranks first. Where stock sits in a wider asset-based lending facility, the same security package covers the receivables and any plant.

A stock-based or asset-based facility typically takes several weeks to put in place, while unsecured stock funding through a working capital loan or revolving line is often arranged within days to a couple of weeks. The longer timescale comes from the work a stock lender must do before lending: an independent valuation of the inventory, a field audit of your stock records and systems, review of supplier terms for retention of title, and security documents including any priority agreement with an existing lender. Clean, current stock reports and early sight of key supplier contracts shorten it. Plan around your peak, so the facility is live before the stock order is placed.

• Stock that does not sell still has to be repaid. Over-ordering on borrowed money is the classic stock finance mistake; our guide to seasonal business finance covers sizing a peak.
• Reporting burden. Late or inaccurate stock reports can freeze drawings.
• Cost. Monitoring and audit fees add to the price of the facility.
• Cheaper routes. Clearing slow lines, negotiating longer supplier terms or buying little and often may release cash without borrowing.