Stock finance to fund inventory and bulk buys

Most ongoing stock finance facilities work on a borrowing base: the lender works out how much of your stock it will lend against, applies an advance rate, and lets you draw up to that figure. As stock is sold and replaced, the figure moves up and down.

1. Initial review. The lender looks at your accounts, gross margins, stock records and the systems you use to track inventory.
2. Stock audit and valuation. A lender's auditor or an independent valuer visits your premises, checks stock against your records and estimates what it would fetch if it had to be sold.
3. Eligible stock is identified. Items the lender will not fund, such as slow-moving or damaged goods, are excluded.
4. Availability is set. The lender applies an advance rate to the eligible value. That figure is how much you can draw.
5. Regular reporting. You send stock reports, often monthly or more frequently, and availability is recalculated.
6. Ongoing checks. Lenders usually carry out periodic field audits and may revalue stock, typically once or twice a year.

Most lenders also take a debenture, which gives them a charge over the company's assets, including the stock.

Lenders value stock on what it would realistically raise if they had to sell it, not on what you paid for it or what you plan to sell it for. That is why the amount offered is usually well below the cost value in your accounts.

• Cost value: what your company paid. In company accounts, stock is generally shown at the lower of cost and net realisable value.
• Net realisable value: the expected selling price, less the costs of completing and selling the goods.
• Orderly liquidation value: what a professional would expect to raise selling the stock over a reasonable period.
• Forced sale value: what the stock would raise in a quick sale, often the most cautious figure a lender uses.

What counts as eligible stock?

Lenders usually fund finished goods with a ready market most readily. Stock is often treated as ineligible, or valued at a lower rate, if it is:

• Slow-moving, obsolete, damaged or near expiry
• Work in progress that would need more work before it could be sold
• Subject to a supplier's retention of title clause, meaning the supplier still owns it until paid
• Held on consignment, in transit, or at a third-party site without the lender's agreement
• Made or branded for one customer, so it would be hard to sell elsewhere

Good stock records, a clear ageing report and an accurate stock system can directly increase how much a lender is prepared to advance.

Beyond the main types already described, a few variations are common.

Stock-only revolving facilities

Some specialist lenders provide a stand-alone revolving facility secured mainly on inventory, without an invoice element. These suit companies that hold a lot of stock but sell for cash or on short terms, such as some retailers and online sellers.

Supplier-funded purchases

Here the lender pays your supplier for a defined batch of stock, often holding it until you call it off for sale. It overlaps with trade finance and suits seasonal stock or bulk buys.

Raw materials funding for manufacturers

Manufacturers can sometimes borrow against raw materials, although lenders tend to apply cautious values because components may be worth little outside your production process. Manufacturers often combine this with invoice and equipment finance.

Stock finance usually costs more than lending against invoices, because stock takes longer to turn into cash and its value is less certain. The total cost combines interest on the amount drawn with a set of fees, some fixed and some ongoing.

• Interest or discount charge on the balance drawn, often set as a margin over a reference rate or as a monthly rate.
• Arrangement fee to set up the facility, and sometimes a renewal fee.
• Valuation and audit fees for the initial valuation and later field audits.
• Monitoring or service fee, usually monthly, for managing the facility.
• Non-utilisation or minimum usage fees on some facilities if you draw less than an agreed amount.
• Exit or early termination fees if you end the facility during a minimum term.

Pricing tends to be keener for fast-selling, easily resold stock with good records, and higher for specialist goods, thin margins or patchy reporting. When comparing offers, look at the total cost over a year at the balance you expect to use, not just the headline rate.

Illustrative worked example

Illustrative example only: actual costs depend on the lender and your circumstances. A wholesaler holds stock at a cost of £400,000. The lender excludes £100,000 of slow-moving lines, leaving £300,000 of eligible stock, which it values at £200,000 on a forced sale basis. It advances 60% of that value.

• Maximum availability: 60% of £200,000 equals £120,000.
• The company draws an average of £100,000 for six months, at an illustrative interest charge of 1% per month: £6,000.
• Monitoring fee of £250 per month for six months: £1,500.
• Arrangement and valuation fees: £2,000.
• Total cost over six months: £9,500.

If the extra stock this funds generates gross profit well above £9,500, the facility may pay for itself. If not, a smaller limit or another product may make more sense.

The amount is set by the value of your eligible stock, the lender's advance rate and your company's overall financial strength. Lenders typically lend only a proportion of a cautious valuation, and some cap stock lending in relation to the invoices or other assets also in the facility.

Factors that increase availability include fast stock turnover, broad demand for the goods, strong margins, accurate stock systems and a clean audit history. Factors that reduce it include seasonal or fashion items, short shelf life, concentration in a few product lines and goods covered by supplier retention of title. Our guide to how much a limited company can borrow covers the wider picture.

Stock finance is secured lending, so the key risks are losing control of assets and personal liability if the business struggles. Check these points in any offer:

• Security: what the debenture covers, and how it affects your existing lenders and future borrowing.
• Personal guarantees: how much directors are liable for and whether the guarantee is capped. See what a personal guarantee means.
• Reporting duties: how often you must report and what happens if reports are late or inaccurate.
• Revaluation: whether the lender can revalue stock and reduce availability at short notice, which could leave you needing to repay quickly.
• Events of default: what triggers default, for example missed reports, falling margins or breaching other agreements.
• Minimum term and notice period: how long you are committed, how much notice is needed to leave, and any exit fees.
• Insurance: most lenders require stock to be insured, often with the lender noted on the policy.

Stock finance suits companies whose cash is tied up in inventory for weeks or months. Where the pressure sits elsewhere, another product may suit better.

• Trade finance is usually better for funding specific supplier payments, particularly imports or a confirmed customer order.
• Invoice finance often costs less and is simpler to arrange if most of your cash is tied up in unpaid invoices rather than stock.
• A revolving credit facility may suit companies wanting flexible funds without stock audits, usually with smaller limits based on turnover.
• A working capital loan suits a one-off stock build, repaid over a fixed term, without ongoing reporting.

It may be possible, but options will be narrower. Because the facility is secured on stock, some lenders focus more on the quality of the inventory and your records than on past results.

Past credit problems that are explained and resolved may be acceptable to some lenders, but expect closer monitoring or a lower advance rate. Many lenders for this product look for two years or more of trading, although some set different minimums. Lower profits can be acceptable where margins on the stock are healthy and there is a clear plan, but each lender decides for itself and approval is never certain.

Stock finance for limited companies, LLPs and partnerships of four or more partners is generally unregulated. The Consumer Credit Act protections that apply to many personal loans generally do not apply.

Your rights are set by the facility agreement and security documents, so read them carefully and consider independent legal or accounting advice before signing. Our guide to regulated vs unregulated business finance explains more.

We are a commercial finance broker, not a lender, and every client gets a dedicated relationship manager, a real person available by phone, email and chat, from your first enquiry until the lender pays out.

1. Check your eligibility in about 60 seconds, with no effect on your credit score.
2. Your relationship manager reviews your stock profile, margins and records to understand which lenders on our panel may fund your type of stock.
3. We approach suitable lenders. They run their own credit checks only after you decide to apply.
4. We help you compare offers on advance rate, total cost, security and terms, and support you through valuation to first drawdown.

We do not charge your company a fee. We are paid a commission by the lender when your finance completes. You can ask how much it is, and it can differ between lenders.

What is a stock audit?

A visit by the lender's auditor to check that the stock exists, matches your records and is in saleable condition. Audits usually happen before the facility starts and periodically afterwards.

Can I get stock finance if my suppliers use retention of title?

Often, yes, but stock still owned by your supplier under a retention of title clause is usually excluded from the borrowing base until it is paid for.

Can online sellers use stock finance?

Some lenders fund stock for online sellers, including stock held in third-party fulfilment centres, provided they can verify and access it.

How often do I need to report stock levels?

Typically monthly, although some lenders ask for weekly reports on larger or faster-moving facilities.

Can a lender reduce my facility?

Yes. If stock values fall, stock ages or reports reveal problems, availability may drop, and you may need to repay part of the balance.

Does stock finance affect my other borrowing?

It can. A debenture may rank ahead of other lenders, and existing lenders may need to agree to the new security.

Is seasonal stock harder to fund?

It can be, because value can fall sharply after the season. Lenders may apply lower advance rates or require it to be sold within a set period.

Can stock finance fund raw materials?

Some lenders will, usually at lower advance rates than finished goods, because raw materials can be harder to sell on their own.