Inventory Financing: 5 Structures and When Each Wins
Inventory ties up working capital and most operators undercapitalize it. The right inventory financing structure can double turnover without consuming cash — but only if you match the product to the inventory type.
Purchase order financing
Lender pays supplier directly when you receive a PO from a creditworthy buyer. You repay when the buyer pays. Cost: 3–5% per 30 days of capital deployed. Best for distributors with strong end customers and thin balance sheet.
Floor plan financing
Used for high-value units (autos, equipment, boats). Lender finances each unit on the floor; you pay a monthly carry fee plus interest. Pay off the unit when it sells.
ABL inventory line
Line of credit against eligible inventory at 50–70% advance rate. Cheaper than PO financing but requires a real balance sheet and ongoing borrowing base reporting.
Vendor financing
Direct extended terms from your supplier (net-60, net-90, seasonal dating). Usually cheapest if available — push for it before adding bank debt.
Letters of credit (import)
For overseas inventory purchases. Bank issues LC to supplier, releases when shipping docs presented. Standard cost: 1–2% per quarter of LC amount. Pairs with inventory line for the post-arrival financing.
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