What is stock finance, how it works & Examples

Stock finance - also known as inventory finance - is a lending service that allows businesses to borrow capital against their goods. It is an asset-based finance agreement in which businesses access funding based on the exact value of their stock, from raw materials to finished products.

Businesses often overstock to take advantage of economies of scale or to prepare for periods of peak trade. However, this can tie up capital - leaving the business unable to pay its accounts payable or fund growth.

Inventory loans allow businesses - often retailers, wholesalers and manufacturers - to lean on stock during slower seasons or periods of reduced revenue to boost cash flow.

Stock finance is common among businesses that engage in international trade, that may hold overseas stock or work with additional risks or delayed payment terms.

How does stock finance work?

Businesses experiencing slower periods or payment delays - but need access to liquid capital - may use their stock as collateral to secure a cash loan. This can include all the products or materials in storage that have not yet been sold.

In a stock finance agreement, the lender will require the borrowing business' stock to be valued by a third party before agreeing on the exact loan amount.

Depending on the agreement, this process may then be repeated on a weekly or monthly basis - with businesses either opting for one-off funding or an ongoing service. Stock finance lending may then continue as long as the exporter needs cash and can make repayments.

Example of stock finance

Exporter Ltd. sells products in its operating country as well as in five other countries around the world. Raw materials are produced in the operating country, with finished products exported to each retail country, where they are stored until they are sold.

Due to seasonal demand for its products, Exporter experiences poor cash flow during certain months of the year. However, it has its own accounts payable owed to suppliers and wants to grow into three new territories in the next year - so it needs access to liquid capital.

Exporter's capital is tied up in its inventory, so it decides to use stock finance facilities from Lender Ltd.

Exporter works with Lender to have its stock valued by a third party, with the valuation being $100,000 USD. Lender agrees to finance the full amount, with Exporter agreeing to repay the funding in full within 120 days, plus a small, pre-agreed fee.

Exporter uses this $100,000 USD cash injection to pay its debts and avoid late payment fees, as well as taking steps to open warehouse spaces in three new territories. And when business picks up for Exporter - and it sells its full stock - it repays Lender in full, plus the service fee.

Lender may agree to extend this funding service to an ongoing monthly agreement, valuing and financing Exporter's fluctuating stock portfolio each month.

Advantages and disadvantages of stock finance

As with all financial services, stock finance offers benefits and potential pitfalls for businesses. Here, Stenn looks at the pros of cons of stock finance compared with alternative financing strategies. 

Advantages of stock finance

The potential advantages of accessing stock finance facilities include:

• New trading opportunities - which may otherwise not be possible for businesses that work with delayed payment terms or cannot afford to grow into new territories.
• Liquid capital - an instant cash boost to avoid bad debt or fund growth.
• Manage seasonal demand - allowing businesses to navigate slow periods by boosting cash flow.
• Only borrowing against owned assets - removing the risks associated with traditional lending, as businesses only borrow against the value of assets they own and can sell.
• Stock management - ongoing stock finance agreements often force businesses to re-evaluate their inventory and purchasing practices to become more efficient and profitable.
• Facilitating international trade - with stock finance available for overseas inventory.

Disadvantages of stock finance

Businesses must also be aware of the potential challenges associated with stock finance:

• Costs and fees - including fees for financial services as well as potential hidden costs such as having stock valued by a third party. 
• Businesses may be ineligible - if inventory is not valuable enough or not deemed a sellable asset by the lender.
• Stock used as collateral - the business borrows against its stock, meaning products may be seized if it is unable to repay.

Financial services and fees

Stock finance agreements typically comprise a range of financial services. These may include the following (however, each agreement is unique and may include some or none of these services):

• Loans - a traditional loan agreement, with the full amount paid back with interest.
• Letter of credit - with the borrower's bank providing a guarantee of full and timely repayment.
• Invoice financing - with the borrower using its accounts receivable as repayment for the loan.

The fees involved in a stock finance agreement will depend on the services accessed, with each including its own repayment structures and costs. Find out more about the financial services available to businesses trading overseas - and their unique fees - in our Resource Hub. 

Am I eligible for stock finance?

Unlike a traditional bank loan, stock finance is not designed for any or all businesses - it is a specific financial service offered to those with appropriate credentials.

To qualify for stock funding services, businesses must hold inventory, either on-site or elsewhere, that can be valued and is deemed 'sellable' by a lender. However, this does not just include retailers who sell stock directly to consumers - it can also include manufacturers and suppliers.

Businesses will also be expected to have a strong trading history and have significant funds tied up in stock. This is to reduce the risk of non-repayment to the lender through either business failure or unsold inventory.

Those engaged in overseas trade may also be eligible for stock finance as there is often no requirement for the stock to be held in the lender's country - as long as it can be verified and valued by a third party.

For businesses able to qualify for stock finance, the loan amount accessed through the service will depend on a range of factors, including:

• Whether the stock is raw materials or the finished product
• The 'sellability' of the assets - e.g., are they seasonal or in demand?
• The accessibility of the stock - e.g., is it on-site, in a warehouse or elsewhere?
• The value of the assets - valued and verified by a third party

International trade finance with Stenn

Does your business engage in international trade that ties up your capital? Stenn finances invoices for small and medium-sized businesses engaged in international trade with delayed payment terms.

Work with Stenn to turn unpaid invoices into liquid capital or find out more about alternative financing options available to your small business in our Resources Hub. Get financed now. 

About the authors

This article is authored by the Stenn research team and is part of our educational series.

Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.

Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.

Check the financing limit available on your deal or go straight to Stenn's easy online application form.

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Disclaimer: The above article has been prepared on the basis of Stenn's understanding of the subject. It is for information only and doesn't constitute advice or recommendation. Whilst every care has been taken in preparing this article, we cannot guarantee that inaccuracies will not occur. Stenn International Ltd. will not be held responsible for any loss, damage or inconvenience caused as a result of anything published above. All those applying for credit should seek professional advice when doing so.