Business funding for inventory purchases

For a business that sells physical goods, timing the stock buy is half the job. Order too little and you miss sales in the busy period. Order early and in volume and you often get better pricing, but the cash leaves the account weeks or months before customers pay for the goods.

Buying ahead of demand

Plenty of good reasons push a business to buy ahead. A seasonal peak is coming. A supplier is offering better terms on a larger order. Shipping times mean the next order has to be placed well before the current one has sold. A new customer or channel needs stock on hand before the first order arrives.

In each case the opportunity is real, but so is the strain on cash. Paying for stock out of the working account can leave too little for wages, rent and the other bills that do not wait for the stock to sell.

Size it to the sell-through window

A short-duration facility works well for inventory when it is matched to how quickly the stock turns into cash. Start with the sell-through window: how long, realistically, from the day you pay the supplier to the day the last of that stock has sold and been paid for.

• How long will the stock take to arrive, and when will it be ready to sell?
• How quickly has similar stock sold in past seasons?
• Do your customers pay at the counter, or on account terms?
• What margin will you make once it has sold, after freight and any discounting?

Those answers point to a sensible amount and a sensible term. Weekly repayments then wind the facility down as the stock sells, rather than leaving a debt in place long after the goods have gone.

The trap of stranded stock

The risk with inventory is not buying it. It is buying more than you can sell in the time you planned. Stock that sits on the shelf is cash you cannot use, and if the facility is still being repaid, the business is carrying both. Slow-moving lines, fashion and seasonal goods that date quickly, and stock bought on an optimistic forecast are where this tends to happen.

A few habits help. Base the order on what has actually sold before, not on the best season you can remember. Keep the facility to the stock you are confident of moving, and fund any speculative extra from your own cash, or leave it for the next order. And keep enough in the account to meet the repayments even if sales start slower than expected.

When it fits

Inventory funding tends to fit best when the demand is reasonably predictable, the margin is clear, and the stock turns over within the term. It is a poor fit for clearing old stock that has not sold, or for propping up a range that is not paying its way.

Every facility is subject to credit approval and documentation. If you have a stock buy coming up and want to know what is possible, an indicative read only takes a few minutes.