Owners consistently overestimate what their inventory will borrow. A warehouse holding $1,000,000 of stock feels like $1,000,000 of collateral. To a lender it is frequently worth a third of that, and sometimes nothing at all.
The gap is not arbitrary. It comes from one question: what would this actually sell for if we had to liquidate it in a hurry?
What is inventory financing?
Inventory financing is credit secured by the goods a business holds for sale. It is usually a component of an asset-based revolving facility rather than a standalone product, advance rates are applied to eligible inventory alongside eligible receivables, and the combined figure produces your availability.
The mechanics of that formula are covered in the borrowing base certificate.
Why are inventory advance rates so low?
Because the lender is not lending against what you paid, or what you would sell it for in the ordinary course. They are lending against net orderly liquidation value (NOLV), what a third-party appraiser estimates the goods would fetch in an orderly sale, net of the costs of getting rid of them.
Three deductions stack:
- The discount a liquidator would demand. Nobody buying distressed inventory pays retail.
- The cost to liquidate, freight, storage, auctioneer fees, disposal.
- The advance rate applied on top of that appraised value.
Receivables are a promise from a creditworthy third party to pay a specific amount on a specific date. Inventory is a pile of goods someone still has to sell. That is the whole explanation for the difference.
What are typical advance rates?
| Inventory type | Typical advance rate | Why |
|---|---|---|
| Finished goods, branded, in demand | 40–60% | Most liquid; identifiable resale market |
| Finished goods, seasonal or niche | 20–40% | Narrow buyer pool, timing risk |
| Raw materials, commodity | 25–50% | Resaleable but often at a discount |
| Raw materials, custom or specialised | 0–25% | Few buyers |
| Work in process | Usually 0% | Half-finished goods have little standalone value |
| Consigned, perishable, obsolete | 0% | Generally excluded outright |
Inventory availability is also almost always subject to a sub-limit, a hard dollar cap, or a ceiling expressed as a percentage of total availability. A large inventory balance does not translate into proportional borrowing power, no matter how good the appraisal.
What makes inventory ineligible?
Beyond the categories above, common exclusions include:
- Slow-moving and obsolete stock, often defined by days-on-hand thresholds written into the agreement.
- Inventory at third-party locations without a signed landlord or warehouseman waiver.
- Goods in transit, depending on terms and insurance.
- Consigned inventory you don’t own.
- Stock subject to another lender’s lien, the position has to be clean.
- Inventory that isn’t insured with the lender named appropriately.
What is a field exam, and what happens in one?
A field exam is an on-site inspection by the lender or a third party, usually one to four times a year on an asset-based facility. They will test your inventory records against physical counts, review your aging and turnover, examine your costing method, and check reconciliation to the general ledger.
Separately, an appraisal by a specialist firm establishes NOLV. That number, not your book value, drives the advance.
What this means practically: inventory records that don’t reconcile are the fastest way to lose availability. A field exam that finds discrepancies typically produces new reserves or a reduced advance rate, and it happens quickly.
Why your availability is lower than your balance sheet
Three reductions stack, and none appear in your financial statements: ineligibility removes stock from the pool, appraisal discounts book value to liquidation value, and the advance rate lends a fraction of what remains. Then sub-limits cap the result.
A business carrying $1,000,000 of inventory at cost might reasonably see eligible inventory of $650,000, appraised well below cost, an advance rate of 50% applied to the appraised figure, and a sub-limit that caps the whole line item anyway. The stock is real. The borrowing power is a fraction of it.
When does inventory financing actually work?
- You hold significant, identifiable, saleable stock, distribution, wholesale, and durable consumer goods fit better than custom manufacturing.
- Turnover is healthy and documented. Slow-moving stock is the enemy of this product.
- Records are clean and reconcile monthly.
- You need working capital that revolves with the stock, rather than a lump sum. That structural point is covered in line of credit vs term loan.
It works poorly when inventory is perishable, highly seasonal, custom-built, or already pledged elsewhere.
What if you need to buy inventory you don’t yet have?
That is a different product. Inventory financing lends against stock you already own; purchase order financing funds the supplier so you can acquire it against a confirmed order. They sit at different points in the cycle, see purchase order financing vs factoring.
How to improve what your inventory will borrow
- Cut obsolete stock. It earns nothing, drags the appraisal, and signals weak controls.
- Get warehouse and landlord waivers signed at every location you hold goods.
- Reconcile perpetual records to physical counts monthly, not annually.
- Track turnover by SKU category and be able to discuss it.
- Keep insurance current with the lender’s endorsement in place.
- Clear stale liens. A forgotten UCC filing from an old lender can make otherwise good inventory ineligible.
Run your own file first
Want to know what your inventory would realistically support once eligibility, appraisal and sub-limits are applied? Run the assessment or send us your inventory report and aging and we’ll show you the read.
Educational only. Nothing here is an offer of credit, a commitment to lend, or advice on any specific transaction. Advance rates, eligibility rules and appraisal conventions vary by lender, collateral and industry; the figures above are illustrative.