The adage “it takes money to make money” rings true when it comes to small-business inventory.
It’s a common narrative, especially for retailers and seasonal businesses: You need to invest a large sum upfront to meet demand or replenish your product, but you don’t have the money.
If you don’t have enough stashed cash, inventory loans and lines of credit can help close the gap.
What is inventory financing?
Inventory financing is simply a loan or line of credit a small-business owner uses to purchase inventory. Some inventory financing products use your inventory as collateral to secure the loan or line of credit in case you don’t repay. However, many inventory loans and lines of credit that alternative lenders offer don’t use inventory as collateral — lenders will extend them to you based on typical underwriting factors including your credit score and cash flow.
Below are eight different inventory financing options that may be right for your business, including both inventory loans and lines of credit. Choose the one that’s best for you based on the amount of inventory you’re purchasing and the lowest annual percentage rate you can qualify for. Here are more suggestions for your working capital needs.
Best for recurring inventory purchases: Lines of credit
If you buy and stock inventory as you need it throughout the year, a line of credit is likely the best inventory financing product for you. With a line of credit, you can draw money whenever you need it and pay interest only on what you borrow. If you can qualify for a line of credit from your local bank, that’s a great option and will likely yield the lowest rate. But if you don’t qualify for bank financing, consider a line of credit from an online lender. We’ve listed four good options below.
Dealstruck: This is the only financing product designed specifically for inventory financing. You pay only interest until you start selling your inventory. Then you begin paying back the balance plus interest.
Lending Club: If you can qualify for Lending Club’s lowest-rate line of credit, this could be your least expensive option.
OnDeck: This line of credit requires the highest annual revenue to qualify. You’ll make payments weekly with this option instead of monthly, as you typically would with other lines of credit.
Kabbage: This option has the lowest minimum annual revenue requirement, but the interest rate on Kabbage’s line of credit can be as high as 113%.
Best for bulk orders: Inventory loans
If you’re buying a large amount of inventory all at once to take advantage of a liquidation sale or bulk discount, or to gear up for the holiday shopping season, a term loan is likely the right inventory financing vehicle for you. With a term loan, you’ll get the entire sum of money and pay it back gradually over several years, plus interest and fees.
If you qualify for a small-business loan from a bank, or SmartBiz, which offers loans backed by the U.S. Small Business Administration, those are your best options. But if you don’t qualify for those low-rate loans, online lenders Funding Circle, Fundation and Lending Club are three good middle-of-the-road options. All the lenders below offer basic term loans that can be used for inventory.
8% to 32%
Two years in business, $75,000 in annual revenue, 600 credit score.
Apply via lenders’ secure sites
* SmartBiz doesn’t technically have revenue or credit score minimums, but most borrowers meet these minimum qualifications.
SmartBiz: This is the most affordable online small-business loan, with interest rates comparable to bank loans.
Funding Circle: This lender has the highest revenue and credit score minimums.
Fundation: You need to have at least three employees to be eligible for this inventory loan.
Lending Club: This loan is similar to that of Funding Circle and Fundation but requires slightly less revenue to qualify.
The bottom line on inventory financing
When it comes to inventory loans and lines of credit, there are several different options depending on how much inventory you need and how often you need it. Once you pinpoint the type of inventory financing that’s best for you, compare your options within that category. You’ll want the lowest APR possible, but make sure you meet the minimum qualifications for the loan.
Find and compare small-business loans
NerdWallet has come up with a list of the best small-business loans to meet your needs and goals. We gauged lender trustworthiness, market scope and user experience, among other factors, and arranged them by categories that include your revenue and how long you’ve been in business.
To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
This article originally appeared on NerdWallet.