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How does stock finance work? What it pays for and when it beats an overdraft

How does stock finance work? A lender pays your supplier and you repay as the stock sells. Here is what it costs and when an overdraft fits better.

Reading time 5 min read
Category Business guides
Written by The bizbritain team
How does stock finance work? A lender pays your supplier for the goods, so you do not have to find the cash up front. You then repay the lender when the stock sells, or at the end of a set term. It is built for businesses that pay for stock weeks before their customers pay them.

Section 01

How does stock finance work?

The idea is simple. The lender's money sits in the gap between paying for stock and getting paid for it.

  1. You agree an order with your supplier

    You choose the stock, agree the price and send the order details to the lender.

  2. The lender pays the supplier

    The lender usually pays your supplier directly. Many lenders fund most of the cost rather than all of it, so you may need to pay part of the order yourself.

  3. You receive and sell the stock

    The goods arrive and you sell them as normal. Some lenders want to know where the stock is held until it is sold.

  4. You repay from the sales

    You repay the lender as the stock sells, or at the end of an agreed term. The lender's charges are added on top.

Some facilities fund one order at a time. Others give you a limit you can use again and again, as you repay each order. If you import, the same idea often goes by the name import finance.

Section 02

What lenders look at

A stock finance lender cares about the goods as much as about your accounts. These are the five things that usually come up.
  • How fast your stock sells: Stock that sells in weeks is easier to fund than stock that sits on a shelf for months.
  • Your margin: The lender wants to see enough profit on each sale to cover its charges and still leave you money.
  • The stock itself: Goods that hold their value and are easy to resell are easier to fund than perishable or made-to-order items.
  • Your supplier: A supplier with a good track record of delivering on time makes the deal less risky.
  • Your customers and your record: Steady customers and a trading history that shows you have sold this kind of stock before both help.

Section 03

What stock finance costs

Lenders price stock finance in different ways, so always ask for the full cost in writing. Most charges fall into three groups.
  • A charge for the time the money is out: This is usually interest or a fee for each week or month until you repay.
  • Set-up fees: Some lenders charge an arrangement fee when the facility starts, or a fee on each order they fund.
  • Extra costs on imports: Paying an overseas supplier can add currency and payment charges.
The first group matters most. The longer the stock takes to sell, the more you pay. So the faster your stock turns, the cheaper stock finance becomes.

Section 04

Stock finance, overdraft or term loan?

Each one suits a different kind of gap. The question is how big the gap is and how long it lasts.
  • An overdraft: This suits small, short swings in your day-to-day cash. It is flexible, but the bank can usually reduce it or ask for it back at short notice.
  • Stock finance: This suits large orders that you pay for well before you sell them. It grows with your orders, and each order is repaid from its own sales.
  • A term loan: This suits a one-off need, such as a single big order or new equipment. You repay a fixed amount each month over an agreed term.
Myth 01

“My overdraft will cover a big stock order”

It might, but it can leave you short. An overdraft limit is usually set for everyday swings, not for a large order. If one order uses most of the limit, there may be little left for wages and bills while the stock sells.

Keep the overdraft for everyday cash, and fund big orders separately.

Our guide to funding seasonal stock with a term loan and an overdraft works through one split in detail. For import finance and purchase order finance, see trade finance explained.
Not sure which fits your business? Look at your biggest orders, how long each takes to sell, and when your customers pay. Then talk to us about business growth finance. We can compare stock finance, an overdraft and a term loan across a range of lenders. You usually need at least 12 months of trading history to apply.

This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.

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