Northway Funding

Inventory financing in Canada: how to pay for stock before it sells

Retailers and wholesalers share a timing problem. Suppliers want to be paid when the goods arrive, but customers pay weeks or months later, when the stock finally sells. Inventory financing is any way of borrowing to bridge that gap. This guide walks through the main options and the one question that matters most: does the repayment match the pace your stock actually moves?

By Northway Funding Team · Published

The cash gap inventory creates

Picture the cycle from the business’s side. You place an order, the supplier invoices you, you pay, the stock sits in a warehouse or on shelves, and then it sells a little at a time. Every dollar spent on inventory is a dollar that is not available for rent, payroll or the next order until a customer buys the product.

For businesses with steady sales, that gap is predictable and fairly small. For seasonal sellers it can be large. BDC notes that seasonal businesses such as retail stores can see sales and revenue significantly higher or lower at certain times of year, and that a line of credit can help bridge the gap between payables and receivables. Stock for a busy season is often bought well before the season starts, which is exactly when cash is tightest.

“Inventory loans” usually means one of three shapes

In practice, owners often pay for inventory with a general-purpose product. The Northway Funding site lists business lines of credit, small business (term) loans, revenue-based financing, invoice financing and non-dilutive capital as the product types its lender network offers. Not every business will see every product, and each lender sets its own terms. Here is how the three most relevant shapes compare for stock purchases.

Business line of credit

How it works: Draw what you need for an order, repay as the stock sells, and the limit becomes available again.

Often fits: Recurring buying cycles where you restock several times a year.

Watch for: A line of credit is usually a demand loan, so read what the agreement says about the lender asking for repayment.

Term financing

How it works: A set amount up front, repaid in fixed instalments over a set period.

Often fits: A one-time build of stock that will be on the shelves for a long time, such as opening a second location.

Watch for: If the term is longer than the stock takes to sell, you keep paying after the inventory is gone.

Revenue-based financing

How it works: Repayment is a percentage of revenue, so payments rise and fall with sales, up to an agreed cap.

Often fits: Businesses with uneven sales where a fixed payment would be hard to meet in slow months.

Watch for: Compare the total payback, not just the percentage, and check how revenue is measured.

A few details from official and site sources are worth knowing. According to the Competition Bureau, a line of credit is a short-term, flexible loan for working capital, also called a demand loan because the lender can ask for full repayment at any time. The Bureau describes a term loan as having principal and interest paid over a fixed period. Northway Funding’s FAQ says that with a line of credit you only pay on what you draw, the schedule is weekly or monthly depending on the lender, and credit replenishes as you pay down. Its FAQ also describes revenue-based financing repayment as a fixed percentage of revenue rather than a fixed monthly amount, with total payback capped at the agreed cap. In every case, the lender’s agreement sets the actual limit, percentage, cap and schedule.

Match repayment to sell-through

The most common mistake with inventory financing is not the rate. It is a mismatch between how long the money is borrowed for and how long the stock takes to sell. Here is an illustrative example with made-up numbers.

Illustrative example only

A gift retailer spends $40,000 in late summer on holiday stock and expects most of it to sell between October and January, about four months.

  • Term financing over 12 months: principal alone is about $3,333 a month before interest. Once the stock has sold in January, the business still has eight more months of payments for goods it no longer has, often while it is trying to fund the next season.
  • Line of credit: the retailer draws $40,000, then pays it down from holiday sales. Because interest is charged only on what is drawn, the balance and the cost shrink as stock sells, and the limit is there again for next year’s order, subject to the lender’s terms.
  • Revenue-based financing: payments are larger in the busy months and smaller afterward, which follows the shape of holiday sales. The retailer would compare the total payback against the other options.

None of these is automatically right. The point is to line up the repayment pattern with the sales pattern, then compare the total cost in each written offer.

BDC makes a related suggestion for seasonal businesses: negotiate repayment terms that match the revenue cycle. It describes seasonal payments as typically keeping interest payments steady through the year while principal repayments fluctuate with revenue. Whether a lender will agree to that structure is up to the lender.

What lenders want to understand about your inventory

A lender considering a business that carries a lot of stock is really asking one thing: how reliably does this inventory turn back into cash? The measure most owners use is inventory turnover, or turns.

An illustrative calculation: if a wholesaler’s cost of goods sold for the year is $240,000 and it holds about $60,000 of inventory on average, it turns its stock four times a year ($240,000 divided by $60,000). That works out to stock sitting for roughly 91 days on average (365 divided by 4). If the same business held $120,000 on average, it would turn twice a year, and each dollar of stock would take about twice as long to come back as cash.

Before you apply, have honest answers ready to questions like these:

  • How many times a year does your inventory turn over, and is that steady or seasonal?
  • How much of your stock is slow-moving or older than a season?
  • Who are your main suppliers, and what payment terms do they give you?
  • Do your bank statements show regular deposits that match your buying cycle?
  • Is the inventory already pledged as security to another lender?

Bank activity matters too, because it shows the cycle in real deposits. When you apply through Northway Funding you can connect a bank account securely through Plaid, and Northway Funding never stores the bank login, or you can upload your last four months of bank statements through the secure portal. Lenders may ask for more during their review, such as an inventory listing or financial statements. If you want to understand how lenders read your credit history alongside all this, see our guide to business credit in Canada.

Inventory as security

Financing used to buy stock is often secured, and inventory is frequently part of what a lender takes security over. Broad security documents can reach inventory along with equipment and receivables. If that is what you are being asked to sign, our guide to general security agreements explains what to check, including whether you can keep selling stock in the ordinary course of business. It is also worth knowing that security given to one lender can affect what a second lender will offer later.

A short pre-application checklist

  1. Write down what the money is for: one order, a season’s stock, or a permanent increase in inventory.
  2. Estimate how long that stock will take to sell, based on your own past sales, not your best month.
  3. Choose the repayment shape that fits that timeline, then look at cost.
  4. Check your supplier terms. Longer supplier terms can reduce how much you need to borrow at all.
  5. Find out whether existing lenders already hold security over your inventory.
  6. Plan for a slow season: what happens if stock sells more slowly than expected?

How Northway Funding fits in

Northway Funding is not a lender. It operates a platform that matches Canadian small and medium businesses with funding offers from independent third-party lenders, and those lenders decide approval, rates and terms. Each offer and any funding agreement is a separate contract directly between your business and that lender, and offers are non-binding until you electronically sign the lender’s funding agreement, which governs the fees and repayment terms.

In the Northway Funding portal, offers a business receives are shown side by side with term details, total payback and effective APR, so you can compare a line of credit against a term or revenue-based option on the same screen. Northway Funding does not guarantee that an application will result in an offer and does not give financial or tax advice. Read how Northway Funding works, or start an application when your numbers are ready.

Sources

This guide is general information for Canadian business owners, not financial, legal or tax advice. Northway Funding is not a lender. It matches businesses with offers from independent third-party lenders, and those lenders decide approval, rates and terms. Nothing here guarantees an offer, an amount or a timeline. Any examples are illustrative. The actual lender written terms govern any offer you receive.