Inventory financing 101
Every ecommerce business needs inventory to sell, but paying for inventory can cause cash flow issues. Most suppliers and manufacturers require brands to pay for stock upfront — at Wayflyer, we’ve commonly seen 30% cash upfront on order and 70% on shipment. And inventory can take anywhere between three and six months to arrive from your first down payment.
Here’s a typical timeline:
- Day 0: You decide to buy $100,000 of inventory.
- Day 1: You connect with your supplier to place the order. They need a 30% ($30,000) payment upfront to get started.
- Day 60: Your products are ready to ship. Before sending the goods, you need to pay the remaining 70% ($70,000) balance.
- Day 90: After four weeks at sea, your goods arrive. You can now start selling. You launch some marketing campaigns and spend $20,000.
- Day 100: Your inventory is starting to sell, but you're $120,000 in the red.
- Day 120: Your stock is sold out. You make 4x margins on your products, so you've made $400,000 in sales and a gross profit of $280,000 ($100,000 to purchase inventory and $20,000 in marketing costs).
Now, for businesses with proven sales and product-market fit, the return on inventory can be enormous — $280,000 profit in this example. if you're buying $100,000 of inventory, you'll be down $100,000 in cash. It could be months before you start recouping that outlay. Like many brands, you would get stuck in short-term cycles and be forced to focus on your next inventory order — not on your growth.
In this article, we explore how to solve these inventory problems with revenue-based financing, from how it works to knowing when to take it.
- Inventory financing can help ecommerce businesses maintain a healthier cash flow, freeing up capital for longer-term investments.
- Revenue-based financing is a popular form of inventory-financing that is short-term and non-dilutive.
- With revenue-based financing, you pay back a percentage of your daily sales — not a fixed lump sum every month.
What is inventory financing?
Inventory financing funds inventory purchases. It frees up working capital to invest in growth, whether that’s running marketing campaigns, investing in new product lines, or hiring new employees.
Technically, businesses can use any type of financing to buy inventory, from venture capital to loans. However, in recent years, specific types of finance have arisen to support inventory purchases for ecommerce businesses:
- Inventory loans: An inventory loan is a short-term loan to ecommerce and retail businesses that enables them to buy inventory. These loans are often secured against the inventory.
- Inventory line of credit: An inventory line of credit is short-term funding to help businesses buy inventory. Unlike a loan, an inventory line of credit can be used multiple times.
- Revenue-based finance: A revenue-based finance partner will give your ecommerce business capital that can be paid back as a percentage of your future sales.
Of these options, revenue-based financing has proven particularly popular in recent years. Revenue-based financing partners like Wayflyer offer solutions that fit your working capital cycle and often have a better understanding of ecommerce economics than traditional lenders. And it’s an unsecured and non-dilutive way to finance inventory — you don't have to guarantee any of the money personally and won't have to give up ownership of your business.
Additionally, revenue-based finance can keep your risk low. Instead of paying back a fixed lump sum each month, you pay back the funding as a percentage of your sales. If you have a slower few weeks or months (ironically, maybe that’s due to lower inventory levels), you pay back less. This is not the case with bank loans or other traditional forms of finance.
When should I take inventory financing?
Your startup has achieved scale and has proven product-market fit. You don't want to take out finance for inventory you're not 100% confident you'll be able to sell.
You’ve had six months of sales. We’ve found that after the six month mark, sales achieve a steady level of predictability for businesses. Along with this predictability, you should have built up a strong understanding of which channels drive sales. For example, if you know your return on ad spend (ROAS) across Facebook and Google is 4x (so you'll make $4 for every $1 you spend), you can be confident in selling the inventory you finance profitably through these platforms.
Once you understand where your sales come from, you can start to forecast what your future might look like and feel more confident about taking on funding from an outside partner. At Wayflyer, we look for brands that have at least six months of consistent sales and more than $20,000 in average monthly revenue before offering financing.
You want to manage peak periods for your business. For example, if you sell seasonal products and experience higher activity around the holidays or Black Friday, you can use inventory financing to make larger inventory orders to ensure you can meet demand and your customers aren't left months waiting for their products to arrive.
You need quick access to cash. Revenue-based financing typically hits your account fast. At Wayflyer, we can create offers in hours and funds can get to your account within days.
You want to keep raising other types of funding. Because revenue-based financing is a short-term and non-dilutive way to finance inventory, it doesn't impact your future ability to raise money from other sources, like venture capital or a bank line of credit.
You will need cash frequently. You can use revenue-based financing to finance inventory frequently — for example, whenever you need to order a new batch of stock. The amount of funding you take can also vary depending on your needs at the time. At Wayflyer, we offer financing from $10,000 up to $20 million.
Inventory financing isn’t always a fit. You should avoid it if:
You need to cover staffing and other operational costs. Revenue-based financing is best suited for inventory and marketing spend.
You’re pre-launch and new-to-market. Without existing revenue streams, no lender will look at your company.
Your finances are inconsistent. If you have low bank balances or are overdrawing regularly, providers likely won’t lend to you. These are negative indicators that you won’t be able to pay back the money.
You’re not ready to add a new layer of complexity to your business. Outside funding requires a new level of financial management that might be too much work for your business.
How do I apply for revenue-based financing?
Keep your activity data handy
Revenue-based financing providers create funding offers by analyzing your ecommerce business’ historical performance data and forecasting future sales. When analyzing data, providers look for consistent sales and strong marketing performance. The more revenue you generate and the better your marketing performance, the more funding you’ll have available to you.
Typically, a revenue-based finance provider will usually ask you to share read-only access to the platforms you use to run your business. At Wayflyer, we look at four types of platforms:
- Your ecommerce platform (for example, Shopify, WooCommerce, or Magento)
- Your marketing platforms (for example, Facebook or Google Ads)
- Your analytics platforms (for example, Google Analytics)
- Your bank account or account with a banking services provider (for example, Mercury*)
In some countries, bank data isn't as easy to share directly with a provider. If this is the case, you'll be asked to share copies of your bank statements.
Calculate the costs
Revenue-based finance providers will charge a percentage fee on the funds you receive — usually between 2-8%. If you were to take $100,000 in funding to purchase inventory and the fee was 4%, you'd pay back $104,000. In this situation, inventory financing will have cost you $4,000 — if you’ve planned it right, that amount could be a drop in the ocean compared to the profits you would make once the inventory is sold.
Figure out remittances
With traditional funding options like loans, you’ll have to repay your lender every month regardless of whether you’ve received your inventory or made any profit. With revenue-based financing, you're only transferring funds to the provider when your business generates revenue.
Let's go back to our initial example. You've received $100,000 in financing from a revenue-based provider, and you need to pay back $104,000. If you agree to pay it back as 12% of your daily sales, your remittance could look like this:
- Day one: $18,000 in sales, so you pay back $2,160
- Day two: $12,000 in sales, so you pay back $1,440
- Day three: $24,000 in sales, so you pay back $2,880
On days where you generate more revenue, you'll transfer more to the provider. And on lower revenue days, you'll transfer a smaller amount.
Typically, funds will be automatically collected from your bank account to your provider daily by an Automated Clearing House (ACH) Pull or a direct debit, depending on where you live.
Want to learn about other types of financing?
Capital is the lifeblood of startups. However, there’s not much education on when, how, and why to use it. Read about other types of financing in our guide, plan for your startup’s future, and get to know what type of capital might work best for you.
*Mercury is a financial technology company, not a bank. Banking services provided by Choice Financial Group and Evolve Bank & Trust, Members FDIC.