Inventory financing in Canada: borrowing against stock

Inventory is cash sitting on a shelf. For retailers, wholesalers, distributors and manufacturers it is often the largest thing the business owns — and the reason it runs short of cash before a busy season. Inventory financing is borrowing to buy stock, or against the stock you already hold.

The two versions

Financing a stock purchase. A lump sum to buy inventory ahead of a season or a large order, repaid as the stock sells. This is often done with a term loan or a short-term loan, sized against your deposits rather than against the stock itself.

Borrowing against stock you hold. The inventory secures a revolving facility, usually as part of asset-based lending alongside your receivables. The limit rises and falls with the value of the stock on hand.

How much a lender will advance

When inventory is the security, a lender does not lend its full value. It lends a percentage of what the stock would fetch if it had to be sold quickly — which is less than its cost, and much less than its retail price.

What moves that percentage:

• How easily it sells. Finished goods with a ready market — building supplies, auto parts, packaged food with a long shelf life — are worth more as security than custom or seasonal items.
• Shelf life. Perishable and fashion stock loses value fast.
• How well it is tracked. A clean, current inventory listing with costs is the document that decides it.
• Where it is. Stock in your own warehouse is simpler than stock spread across third-party locations.

Raw materials and work-in-progress are usually advanced on at much lower rates than finished goods, or not at all, because they are hard to sell as they are.

What you will be asked for

• An inventory listing: what you hold, where, and at what cost
• How quickly it turns — how long an item sits before it sells
• Your usual bank statements and incorporation documents
• For larger facilities, periodic stock counts or reports while the facility is open

When a different product fits better

If the need is seasonal and repeats every year, a line of credit sized against your revenue can be simpler than a facility tied to stock counts: you draw before the season and pay it down as it sells.

If the stock is already sold — you have the order and are waiting to be paid — the value is in the receivable, not the stock. Invoice factoring or asset-based lending on receivables is the better fit.

If you have both receivables and inventory, an asset-based facility that lends against both usually gives the largest limit at the lowest cost.

Before you borrow to buy stock

• Be sure it will sell in time. Stock that sits past the loan's term means paying for the loan out of something else.
• Match the term to the turn. A loan that ends before the stock sells puts pressure on the account; one that runs long after costs more than it needs to.
• Keep supplier terms. Paying suppliers early to get a discount is only worth borrowing for if the discount is bigger than the cost of the money.

For how much you could borrow from your deposits, try the business loan calculator. For how stock ties up cash in the first place, see what working capital is.