Inventory financing

The lender takes a security interest in inventory and advances against it, typically as a component of a borrowing base alongside receivables. Availability rises as you buy stock and falls as you sell it — at which point the receivable it becomes takes over as collateral.

Why advance rates are low

A liquidator selling your stock is selling into a bad market to buyers who know you are distressed. The relevant number is net orderly liquidation value, which is what an appraiser thinks the goods fetch in a controlled sale after costs, and it is well below cost for most inventory. Advance rates follow that appraisal, not your balance sheet.

What moves the appraisal: whether the goods are standard or bespoke, whether they have a resale market, shelf life, seasonality, whether they are finished or work-in-progress, and whether they carry a brand that a manufacturer can restrict from resale.

Variants

• Borrowing base inventory line: revolving, monitored by certificates and periodic field examinations
• Floor plan: unit-level financing for dealers of titled goods — vehicles, boats, equipment — with each unit financed on delivery and repaid on sale. Curtailment payments reduce the balance on ageing units, and out-of-trust sales, meaning selling a unit and not remitting, are the classic default
• Purchase order financing: funds the supplier directly to fill a confirmed order, which is adjacent but not the same thing

PMSI

A supplier or lender financing specific new inventory can take a purchase-money security interest that ranks ahead of an existing blanket lien on that inventory — but only if it is perfected before the debtor receives the goods and written notice is given to the existing secured party. The steps are technical and missing one loses the priority.