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What is stock finance?

By Richard Olsen

Stock finance is a popular form of funding used to boost cash flow by unleashing capital in your warehouse.

It utilises unused stock as security to raise finance from lenders. If used correctly, it is a great way to free up money while enabling you to retain the supplies you need to operate.

We have explored stock finance in more detail, including whether it’s the right fit for your business.

How does it work?

As already mentioned, stock finance uses unused inventory as security. This minimises the risk to the lender, allowing them to seize your stock to clear the debt if you default on payments.

Any lender offering stock finance will request a third-party stock valuation. The valuation will highlight how much your inventory is worth and be used to set the funding amount and terms of the loan.

After this point, you will need to update the lender with your stock listing (usually on a weekly or monthly basis). They will then adapt the funds based on any movement.

Stock finance is commonly provided alongside an invoice finance facility. In such a scenario, once your stock is delivered and an invoice sent to your customer, assuming they are a business, you will use the funding given to repay the stock finance provision.

In some cases, especially for customer-facing brands, stock finance takes the form of a short-term loan or credit line. It may also include merchant cash advances, where you borrow money upfront and repay the lender with a percentage of future sales.

Who uses stock finance?

Many companies will use stock finance, but the main caveat is that you must be a product-based business with inventory. Service-based products are unlikely to meet the criteria.

Examples of those who might use stock finance include:

  • Retailers (including those in the e-commerce sphere)
  • Manufacturers
  • Suppliers
  • Dealerships

It is also beneficial for seasonal ventures. As unused stock is crucial, you will raise finance against your inventory in your off-peak periods. Doing so injects much-needed capital into your company when revenue is lower, ensuring your survival.

The pros

There are many advantages to utilising stock finance. We have listed them below.

  1. It’s confidential. You will not need to disclose that you are using stock finance to your customers or stakeholders, so you maintain privacy.
  2. The funds may be used anywhere. Once you raise finance from a stock facility, there are no limitations to where you use it, meaning it could be used to fuel growth, fill gaps or cover significant expenses.
  3. It offers consistent capital. A stock finance facility often operates as a recurrent credit line, offering funding aligned to your evolving stock listing. It means you gain regular capital, which assists in cash flow management.
  4. It funds your operating cycle. The credit offered by invoice finance fuels your operating cycle, enabling you to gain capital while keeping the supplies you need to be productive. You will also be required to hold significant stock, which will help you to meet demand.
  5. It supports trade. If you are an importer or exporter, you will still be able to raise finance in the UK even if your inventory is held overseas, enabling you to continue to trade.
  6. All kinds of inventory count. Many types of stock will be counted in your valuation, meaning regardless of the materials you store, you will still be able to utilise stock finance.


The cons

Alongside the rewards, there are factors that you need to consider to determine if stock finance is right for your business. We have explored them below to help you weigh up your decision.

  1. It is expensive. Stock finance is more costly than other forms of funding. You need to pay for the initial stock valuation and repeat valuations, which means there may be recurring fees to cover, as well as ongoing monthly interest rate charges.
  2. Growth complicates matters. If you intend to grow your business, your funding may fluctuate as inventory moves more frequently. It also makes it harder to track movement.
  3. Documentation is required. Substantial documentation is needed for the lender to become comfortable and approve your facility. Examples include balance sheets, profit and loss statements, inventory turnover ratios and performance records. Obtaining this information may slow the process.
  4. You need substantial inventory. Some lenders will not underwrite the loan unless you have a specific stock value – in some cases, as much as six figures. It means some businesses will be locked out of this funding stream.
  5. Stock may be seized. If you don’t keep up with repayments, the lender has the right to take your inventory to recoup the balance, with could lead to significant disruption. In some instances, the stock may reside in the lender’s warehouse.


Is stock finance right for your business?

If you are a product-based venture, stock finance could be an ideal solution to turning your unused inventory into working capital. It’s beneficial for managing cash flow, even in off-peak seasons.

However, there are significant considerations you should make to determine if it is a fit for your business. These include the expense and documentation involved, the value of your stock and how it might impact future growth.

If you are considering stock finance as a cash flow management tactic, a UKBA advisor will guide you through the process. They will also present alternatives that might better suit your needs or enhance your funding pool.

Richard Olsen | UK Business Advisors (

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