Inventory Financing and Factoring
Non-equity capital that fronts the cash for inventory or invoices, repaid as the product sells. The bridge that lets CPG brands grow without giving up more ownership.
Inventory financing and factoring are non-equity ways to fund the cash gap between paying for inventory and getting paid by customers. Instead of raising equity (which dilutes ownership) or stretching the founder’s savings, the brand borrows against the inventory it owns or the invoices it expects to collect. Repayment comes out of sales, not the brand’s bank account. For a CPG brand fighting working capital pressure, these tools are often the difference between scaling and stalling.
The category has grown sharply since 2018. Wayflyer, Clearco, 8fig, Parker, and Settle have raised hundreds of millions of dollars to fund DTC and omnichannel brands. Traditional invoice factoring has existed for decades. Each model has different costs, requirements, and trade-offs.
Revenue-Based Financing
Revenue-based financing (RBF) is the most accessible option for early-stage CPG brands. The lender provides a lump sum, the brand pays it back as a percentage of daily or weekly revenue until a fixed total is reached. Costs are typically expressed as a flat factor (1.06 to 1.20 over six to twelve months), not an APR, which makes the effective annualized cost 10% to 30% depending on speed of repayment.
Major players: Wayflyer (typical advance: $50K to $20M, factor 1.06 to 1.12), Clearco (formerly Clearbanc, $10K to $20M, factor 1.06 to 1.12), 8fig (focuses on Amazon and inventory restocking), Parker (corporate card with built-in financing), Settle (combines AP automation with inventory financing).
Requirements: typically 4-6 months of revenue history, $250K+ in trailing 12-month revenue, and connected commerce data (Shopify, Amazon, Stripe). The lender models forward revenue from historical data and sizes the advance accordingly. Approval is fast, often within 48 hours, because the underwriting is automated against transaction data rather than personal credit.
The trade-off is cost. A 12% factor on a 6-month repayment is roughly 24% APR. For a brand whose gross margins are 60%+, that math works. For a brand at 40% margins, RBF can compress profitability to nothing. Founders treating RBF as “free money” because it’s non-dilutive often discover the real cost only after the second or third advance.
Invoice Factoring
Invoice factoring sells outstanding receivables to a third party at a discount. The brand ships a $100,000 order to a retailer on Net 60, the factor advances $85,000-$92,000 immediately, and collects the full $100,000 from the retailer when payment comes due. The factor keeps the spread as its fee.
Two structures:
Recourse factoring (cheaper, 1-3% per invoice): if the retailer doesn’t pay, the brand is on the hook to repay the factor. Most common for brands selling to established retailers with reliable payment history.
Non-recourse factoring (more expensive, 3-5%+ per invoice): the factor absorbs the loss if the retailer doesn’t pay. The factor underwrites the retailer’s credit, not the brand’s, which is why factoring is sometimes more accessible than other forms of debt for small brands selling to large customers.
Factoring works best when the customer is a major retailer with strong credit (Sephora, Target, Walmart) and the brand needs cash faster than the retailer’s payment cycle. It works poorly when invoice volume is small (the per-invoice fees become disproportionate) or when the retailer disputes invoices frequently.
Purchase Order Financing
Purchase order (PO) financing funds the production cost when the brand has a confirmed order it can’t afford to manufacture. The lender pays the contract manufacturer directly, the brand ships the order, and the receivable gets factored or collected on net terms to repay the lender. Costs are typically 1.5% to 6% of the PO value per month outstanding, which can compound to 20-40%+ APR.
PO financing is the most expensive of the three options because the lender is taking the most risk. The product hasn’t been made yet, the customer hasn’t been paid by, and the brand is often new. Most PO financiers require a verified order from a creditworthy customer (a major retailer, not a small boutique) before they’ll fund.
This is the option brands turn to when they land a major retail order they couldn’t otherwise produce. A $500K Sephora order from a brand that doesn’t have $200K in production capital is the textbook scenario. PO financing makes the order possible at the cost of significant margin compression.
Traditional Inventory Loans
Banks and asset-based lenders offer revolving credit lines secured against inventory. The brand draws against the line as needed, pays interest on the outstanding balance (8% to 14% APR typically), and repays as inventory sells through.
Requirements are higher than RBF: typically $5M+ in annual revenue, audited financials, and significant collateral. Banks underwrite the inventory at a discount (often 50%) to its book value, which means a brand with $1M in inventory might get a $500K line. The lower cost is worth the higher friction for established brands, but most early-stage CPG founders don’t qualify.
How to Choose
The right financing model depends on stage, gross margin, and the specific cash gap being funded.
Stage zero to $500K in revenue: equity, founder savings, or friends and family. RBF and factoring usually aren’t available or aren’t worth the cost at this size.
$500K to $5M, mostly DTC: revenue-based financing makes sense for inventory restocks and marketing flexibility. Cost is high relative to bank debt but accessible without significant assets or revenue history.
$1M to $20M, growing wholesale: invoice factoring on retailer receivables is often the cheapest and most predictable option. PO financing for specific large orders if working capital is short.
$5M+ with significant inventory and revenue: traditional inventory lines and asset-based lending become available and are usually the cheapest debt option.
The mistake most founders make is treating one of these tools as a permanent solution. Inventory financing bridges a working capital gap. It does not fix a broken unit economics model. A brand that can’t service the cost of financing was probably going to fail anyway, just slower.
Frequently Asked Questions
What is the difference between inventory financing and factoring?
Inventory financing lends against inventory the brand owns. Factoring sells invoices the brand is owed. The first is about funding stock before it sells. The second is about getting paid faster after it sells. Both compress the working capital gap, but at different points in the cash cycle.
Is revenue-based financing cheaper than venture capital?
Cheaper in dilution, more expensive in absolute cost. RBF doesn’t take equity, so the founder keeps ownership. But the implied APR of 15-30% is far higher than equity’s cost of capital in a successful outcome. RBF is right when the brand can pay it back from operating cash flow. Equity is right when the brand can’t.
Can a brand use multiple financing sources at once?
Yes, and most growing CPG brands do. A brand might run a Clearco advance against marketing spend, factor Sephora receivables for wholesale cash, and use PO financing for a large Target order. The risk is layering enough debt that operating cash can’t service it. Founders without a finance lead often get this wrong.
What happens if I can’t repay RBF?
Most RBF contracts include personal guarantees that activate if the brand goes under. The lender can pursue the founder personally for the remaining balance. Brands that take RBF without reading the personal guarantee clauses sometimes discover this only when it’s too late. It’s a meaningful risk that doesn’t exist with equity.
How fast can I get inventory financing?
Revenue-based financing approvals can happen within 48 hours of connecting commerce data. Invoice factoring typically funds within 1-3 days of invoice verification. PO financing can take 1-2 weeks depending on customer verification. Traditional bank lines take months to set up but provide ongoing access once approved.
Sources
- Wayflyer, “The State of E-commerce Financing,” 2024. Revenue-based financing benchmarks and use cases.
- Clearco, “Funding Without Dilution,” 2024. RBF mechanics and repayment structures.
- Beauty Independent, “How Indie Brands Are Funding Growth Without VC,” 2024. Real-world adoption of non-dilutive financing in beauty.
- Federal Reserve, “Small Business Credit Survey,” 2024. Comparative cost and access data across small business financing sources.