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What is stock finance and why does it matter?

If you hold an inventory of stock in store waiting to sell it on to customers, chances are you are sitting on a source of funding that could sort any cashflow problems you might be experiencing and help you send your business to the next level.

It’s called stock or inventory finance. Stock finance is a way in which you can raise finance against the stock owned by your business.

The lender will determine what percentage of the net value of your stock that can be financed. This amount will vary from business to business. It will depend on a number of factors including the quantity of finished goods; work in progress or raw material in stock, how sellable the goods are and where the goods are stored.

  • How does it work
  • The pros
  • The cons
  • Is stock finance for me?
  • Why stock finance matters

How stock finance works

Once you have found a lender, they will make sure a third-party stock valuation is carried out. Once the stock finance facility is agreed, you provide the lender with your monthly or weekly stock listing. The lender then provides you with updated funding based upon your stock movement.

Stock finance is often – but not always – provided in conjunction with an invoice finance facility so that once the stock is delivered and invoiced, the invoice finance repays the stock finance.

The pros

  • Helps to fund your business as you are required to hold significant stock
  • It’s a confidential facility so no one outside your business needs to know how you are funding your business
  • Stock finance can provide significant capital injection and ongoing working capital
  • The funds generated can be used for any purpose
  • Suitable for seasonal retailers
  • If you are an exporter or importer you can still use stock funding to release funds in the UK even if the stock is held overseas
  • Funds can be released against all kinds of inventory including raw materials and work in progress

The cons

  • Stock financing is a good short-term solution, but it is expensive
  • Growth can make stock finance more complex as the amount and variety of your inventory changes and grows
  • Getting the right balance between your cashflow and your inventory can be tricky, and costly if you get it wrong – too much ties up cash in unsold stock while too little stock means you might lose sales because you are unable to fulfil orders
  • Setting up stock financing can be expensive because a detailed appraisal of your stock needs to be carried out by a qualified valuer
  • You will need to submit detailed financial records to the lender, including tax returns, balance sheets, profit and loss statements, inventory turnover ratios, and any other records that demonstrate how your business is performing
  • Ongoing costs may also be high because stock appraisals need to be carried out on a regular basis
  • Fail to make your payments and your lender may seize inventory of similar value to help them recoup the loan

Is stock finance for me?

To qualify for stock financing there are some basic criteria you need to meet.

First and foremost, your concern needs to be a product-based business. By nature of the type of financing, your business cannot be a service-based business.

You will need to have some trading history behind you. Potential lenders will want to see that you have been trading for at a year or more. The longer you’ve been in business the better the terms will be able to get. You will also need a solid credit history, including a good business credit score, to even be considered.

In certain cases, you will need to have a significant value tied up in stock. Some lenders will only consider lending to businesses that hold inventory worth six figure sums in order to make time spent underwriting the loan worth the investment.

Finally, if you need financing for inventory right away, stock financing may not be for you. Depending on your lender, your credit history, and your needs, the underwriting process may take weeks or even months if you use a traditional lender like a bank. Financing from an online lender will be faster, but more expensive.

There are other types of debt funding available which might suit your business better.

Why stock financing matters

Stock finance matters because it is a great way of maintaining cashflow, the lifeblood of your business. Cashflow is essential in keeping your business running smoothly. It provides an alternative means of financing your business if you are not getting any joy from more traditional sources of funding.

Retail businesses and some areas of manufacturing are suffering at the moment. Finance that allows SMEs to leverage cash tied up in their stock in order to keep them operational is a good thing.

To find out more about stock finance call one of our experts today on 0203 327 0567.

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