Inventory financing is borrowing money with your stock as the security: a loan or a line of credit that a lender sizes from the value of the inventory you hold or are about to buy, and can claim if you don't repay. The lender doesn't lend the full value. It works out a borrowing base, counting only stock it could sell (not expired, slow or half-made) and lending a percentage of that, then asks for regular inventory reports to keep the number current. For a small maker with perishable stock, the base is often smaller than expected, so trade credit, purchase order financing or a general line of credit can fit better. Below is how a borrowing base is worked out, what financing costs on a real order, the alternatives, and the records lenders ask for.
The short version
- Inventory financing is a loan or credit line secured by your stock.
- Lenders count only eligible stock: sellable, not expired, not too old, not work in progress.
- They lend a percentage of eligible stock, the advance rate, which is lower for perishables.
- The cost depends on how long you borrow: work it out per order, not per year.
- Trade credit from suppliers is often the cheapest financing there is.
- Lenders want regular inventory reports by item, cost, location and age.
- TaroStack keeps the stock value, ages and dates a lender asks about. More below.
How a borrowing base works
The lender looks at your stock, takes out what it would struggle to sell, and lends a share of the rest. Here's an example for a small maker with $60,000 of inventory. The advance rates are illustrative; every lender sets its own.
| Finished goods | Raw materials and packaging | |
|---|---|---|
| Inventory at cost | $22,000 | $38,000 |
| Less: expired or within 30 days of date | −$1,500 | −$800 |
| Less: not moved in 180 days | −$1,000 | −$4,200 |
| Less: custom packaging nobody else can use | −$6,000 | |
| Eligible | $19,500 | $27,000 |
| Advance rate, for example | 50% | 30% |
| Borrowing base | $9,750 | $8,100 |
So $60,000 of stock supports about $17,850 of borrowing. Printed packaging, short-dated food and slow stock count for little or nothing, because a lender couldn't sell them if it had to. The base is recalculated each month from your inventory report, so it rises and falls with your stock.
What it costs, on a real order
Windward Roots, the made-up taro business I use in these examples, wins a grocery order. A co-packer run of 5,000 bags costs $12,000, paid when it's made. The grocer pays 30 days after delivery, which is about 75 days after the co-packer is paid. Here's what bridging those 75 days costs in four ways, using illustrative rates:
| Option | How it works | Cost for 75 days |
|---|---|---|
| Line of credit at 12% a year | Borrow $12,000, repay when the grocer pays | $296 |
| Inventory loan at 15% a year, plus a $250 fee | Secured by the stock, repaid on sale | $620 |
| Purchase order financing, 3% a month | The financier pays the co-packer against the grocer's order | $900 |
| Merchant cash advance, factor 1.3 | A lump sum repaid from card sales | $3,600 |
Line of credit $12,000 × 12% × 75 ÷ 365 = $296
Inventory loan $12,000 × 15% × 75 ÷ 365 = $370, plus $250 = $620
PO financing $12,000 × 3% × 2.5 months = $900
Cash advance $12,000 × 0.3 = $3,600
The order's margin decides which you can afford. At $3.41 a bag, 5,000 bags bring $17,050, and the co-packer's $12,000 leaves $5,050 before freight and everything else. A $296 interest bill is fine; a $3,600 cash advance takes most of the profit. This is general information, not financial advice; real offers vary, so compare the total cost of each in dollars for the time you'll actually borrow.
The cheapest financing: your suppliers
Before a lender, ask the supplier. Payment terms of net 30 from a co-packer or packaging supplier finance part of the gap at no interest, and paying a deposit with the balance on delivery shortens it. Customers can help too: a deposit on a large order, or shorter payment terms in exchange for a small discount. And holding less stock in the first place frees cash: the trade-off between a supplier's minimum and cash on the shelf is in minimum order quantity, and how a co-packer's run ties up cash is in what is a co-packer.
What lenders ask for
| Record | Why they want it |
|---|---|
| Inventory report: item, quantity, cost, location | To calculate the borrowing base |
| Ageing: how long since each item moved | To exclude slow stock |
| Expiry dates for perishable stock | To exclude what won't sell in time |
| Count results against the records | To trust the report |
| How stock is valued, and freight included | To trust the cost |
| Insurance on the stock | Their security |
| Financial statements | To judge the business |
Some lenders also send someone to count and inspect, called a field exam. A business whose records match its shelves gets a higher advance rate and fewer questions; one whose count is a guess gets the reverse. How to make the count right is in year-end inventory count, and how stock is valued in what is inventory valuation.
Where this stops working
A borrowing base built from a spreadsheet is a monthly scramble: count, price, sort by age, take out the expired, and send it off, while the lender wonders why March's report doesn't match February's. Ageing by hand is a guess. Expiry dates live on the boxes. And when the field exam comes, the count disagrees with the report, the advance rate drops, and the line you were counting on for the grocery order shrinks.
How TaroStack does it
TaroStack keeps the inventory report a lender wants as a by-product of running the business.
The value, by site and type, any month. Stock value is kept at what it really cost, in FIFO layers or moving average, with freight and other landed costs spread across each delivery, and split by site and by type (raw materials, packaging, finished goods), with a month-by-month history. The inventory report for the borrowing base is a screen and a CSV export, not a count night.
Age and dates, per item. Stock that isn't moving shows how long since it last went out, which is the ageing a lender excludes on. Every lot carries its dates, and TaroStack forecasts what will expire before it's sold and what it cost, so the short-dated deduction is a number, and so is the stock worth selling before it gets there.
Counts that match. Counts run on a phone, even in a walk-in with no signal, and show what a difference is worth before it's posted. Every movement is recorded with who, when and why, so when the field exam comes, the records and the shelves agree. Every list exports to CSV for the lender or your accountant.
| The lender asks | On a spreadsheet | In TaroStack |
|---|---|---|
| Inventory at cost, by type | A monthly scramble | Stock value by site and type, exported |
| How old is each item? | A guess | Stock not moving, with days since it last went out |
| What's short-dated? | Read the boxes | Lots with dates, and the expiry forecast |
| Does the count match? | Often not | Counts with their value, every movement recorded |
Stock value, counts, lots, expiry and CSV exports are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.