Inventory finance provides funding secured by or linked to inventory that a business purchases, produces or holds for sale. Availability depends on eligible goods, valuation, control, turnover and the lender's advance rate and reserves.
How is borrowing capacity calculated?
If eligible inventory has an accepted value of $400,000 and the lender applies a 55% advance rate, gross availability is $400,000 × 55% = $220,000. A $30,000 reserve reduces illustrative net availability to $190,000.
Illustrative inventory finance availability
| Calculation step | Amount or rate | Result |
|---|---|---|
| Gross inventory | $500,000 | Recorded cost |
| Ineligible inventory | ($100,000) | Excluded stock |
| Eligible inventory | $400,000 | Collateral base |
| Advance rate | 55% | $220,000 gross availability |
| Reserve | ($30,000) | $190,000 net availability |
The calculation is illustrative. Lender definitions, valuation and facility limits control actual availability.
Which inventory may be excluded?
Slow-moving, obsolete, consigned, damaged, work-in-progress, foreign-held or hard-to-verify stock may be ineligible or receive a lower value. Eligibility should follow the finance agreement.
Inventory finance vs. purchase order finance
Inventory finance is based on goods held or controlled. Purchase order finance funds performance of a confirmed customer order. The collateral, repayment source and monitoring differ.
What should be monitored?
Track eligible quantity, location, title, valuation, age, turnover, insurance, liens, reserves and sales proceeds. Inventory reports should reconcile to the warehouse and general ledger.
