Inventory Financing in Canada: How It Works (and When It Doesn’t)

Q: Do lenders require audits or field exams for inventory financing?

Often, yes—especially for asset-based lenders. Field exams and collateral audits help lenders verify inventory records, controls, and valuation.

By Brent Finlay, Business Finance Specialist (CPA,CMA MBA)
Originator of $150M+ in Loans & Leases for 100’s of Canadian SME’s | Creator of the BFE 5-Step Strategic Funding Process | Fractional CFO & Change Management Expert.
Published: Feb 12, 2026. Updated: Feb 16, 2026

Inventory financing can sound straightforward: “We have inventory—so we should be able to borrow against it.”

In practice, lenders are selective. The question isn’t whether inventory exists. The question is whether it’s financeable collateral—meaning it can be valued, tracked, and liquidated with reasonable certainty if things go sideways.

This page explains how inventory financing works in Canada, what lenders evaluate, and the most common reasons inventory-backed requests stall or get declined.

Part of: Refinancing and Working Capital — Answers

Answers Navigation

Business Financing — Answers
Equipment Financing & Leasing — Answers
Refinancing & Working Capital — Answers
Fractional CFO — Answers
All Answers

What “inventory financing” usually means

Inventory financing is working capital funding that is secured by inventory (sometimes alongside A/R). It is typically structured as:

a revolving facility (similar to a line of credit), where borrowing capacity is tied to eligible inventory value, or
part of an asset-based lending (ABL) facility that includes both inventory and receivables.

Some lenders market “inventory financing” loosely, but true inventory-backed lending generally requires stronger controls than a conventional bank LOC.

When inventory is financeable (the lender’s perspective)

Inventory is more financeable when it is:

1) Liquid and sellable

The lender wants confidence it can be sold at a predictable value.

commodity-like goods and standard SKUs tend to be easier
highly specialized, custom, or slow-moving inventory is harder

2) Trackable and verifiable

Lenders want to confirm:

what inventory exists
where it is located
how it is valued
whether it is owned free and clear (or already pledged)

Strong inventory systems help (ERP, perpetual counts, cycle counts, clean SKU data).

3) Not obsolete, damaged, or overly concentrated

Obsolescence and shrink are major lender risks. So is inventory that depends on a single customer or single project.

4) Stored in a lender-comfortable way

Where the inventory sits matters:

owned warehouse vs third-party warehouse
commingled vs segregated
domestic vs cross-border
consigned inventory vs owned inventory

In some cases, lenders prefer third-party logistics with good reporting and controls.

How lenders typically value inventory

This is where many requests fail.

Lenders generally don’t lend against retail price. They lend against a conservative view of liquidation value.

Expect lenders to look at:

cost vs market value
turnover and aging
historical write-downs
gross margin stability (helps validate pricing power and liquidation value)
third-party appraisals (in some cases)
audit findings (ABL lenders often require field exams)

Common structures (what you’ll see in the real world)

1) ABL facility (A/R + inventory)

This is the most common “serious” working-capital structure when inventory is important:

borrowing base includes eligible A/R + eligible inventory
lender monitors borrowing base regularly
audits/field exams may be required

2) Conventional LOC with inventory considered (but not a formal borrowing base)

Some banks consider inventory as part of overall collateral comfort, even without a strict borrowing base.

3) Purchase order (PO) financing or trade finance (special cases)

If inventory is being built or purchased for specific orders, some structures are driven by purchase orders, supplier payments, and controlled release of goods.

This is a different underwriting model than “inventory on the shelf.”

What lenders evaluate (approval checklist)

1) Inventory quality and turnover

Lenders want to know:

how fast inventory sells
how much is aged or slow-moving
whether there is seasonality
whether product becomes obsolete quickly

2) Concentration and customer risk

If inventory is tied to a small number of customers or a single contract, lenders may reduce advance rates or decline.

3) Inventory controls and reporting

This is a major driver of approval.
Lenders look for:

accurate counts
clean SKU and costing methods
consistent valuation
clear ownership and location tracking

4) Gross margin stability

Margins help validate collateral value and indicate whether the business has operating buffer.

Thin or volatile margins increase lender caution.

5) The complete working capital cycle

Inventory financing is rarely evaluated alone.
Lenders want to understand:

inventory → sales → receivables → collections
payment terms to suppliers
timing gaps and seasonality

The best files explain the full cash conversion cycle clearly.

When it doesn’t work” (most common reasons for decline)

Inventory financing often stalls when:

inventory is slow-moving, obsolete, or hard to liquidate
inventory records are inconsistent or unreliable
goods are consigned (not owned) or title is unclear
inventory is heavily work-in-progress without clear valuation
the business can’t support reporting requirements
customer disputes or returns are frequent
the request is actually covering ongoing operating losses

A decline often means the lender doesn’t believe the inventory is reliable collateral—not that the business has no options.

How to improve approval odds

If you want inventory financing to be taken seriously, focus on:

Clean inventory reporting

show inventory aging
reconcile counts
improve SKU and costing clarity

Document the cash conversion cycle

supplier terms
production/lead time
sales cadence
collections profile

Pair inventory with A/R where appropriate
Inventory-only requests can be harder than ABL structures that include receivables.
Prepare for lender diligence
Inventory-backed lenders often require:

field exam / audit
collateral reporting cadence
clear documentation

What documents you should prepare up front

To avoid delays, be ready with:

year-end financials + current interim statements
detailed inventory report (by SKU if possible) with aging
costing method explanation (how values are calculated)
AR and AP agings (often required for working-capital underwriting)
recent bank statements
debt schedule (balances, rates, maturities, payments)
summary of where inventory is stored and who controls it
basic cash flow view (13-week forecast is helpful in time-sensitive cases)

Frequently Asked Questions

Can you actually borrow against inventory in Canada?

Sometimes, yes—but lenders are selective. Inventory must be financeable collateral, meaning it can be valued conservatively, verified, tracked, and liquidated with reasonable certainty.

Is inventory financing the same as a line of credit?

Not always. Some LOCs consider inventory as part of collateral comfort, but true inventory financing often involves a borrowing base and more frequent reporting—especially in asset-based lending structures.

What inventory types are hardest to finance?

Highly specialized, custom, slow-moving, perishable, or rapidly obsolete inventory is harder to finance. Lenders prefer inventory that is standard, saleable, and easy to value.

Do lenders require audits or field exams for inventory financing?

Often, yes ... especially for asset-based lenders. Field exams and collateral audits help lenders verify inventory records, controls, and valuation.

What documents are needed for inventory financing?

Lenders often request financial statements, interim reporting, inventory reports with aging, costing/valuation methods, AR/AP agings, bank statements, and details on where inventory is stored and who controls it.

What if inventory financing isn’t possible?

If inventory isn’t financeable, alternatives may include A/R-based facilities, refinancing existing debt, equipment financing to reduce cash strain, or hybrid structures depending on the business and assets.

Need help with working capital and inventory-backed options?

Most people contact me when they have a pressing financing issue and don’t know where to start—or they’re stuck mid-process, have been declined, or need a clear next step. If you’re too busy running the business (or supporting a customer) and want an experienced financing specialist to map options and move things forward, reach out.

**Three ways to move forward:**

1. Access my free 5 Step Strategic Funding Process through this link
2. Email your situation through my contact form
3. Book a 15-minute discovery call through this calendar link

Or call: 905-690-9874

Business Financing for Inventory

**About the Author**

Brent Finlay helps Canadian SMEs locate, secure, and manage business capital ...lines of credit, loans, and leases ... across working capital and tangible asset financing (AR, inventory, equipment, and real estate). He also provides fractional CFO support to improve cash flow visibility, financing readiness, and decision-making through growth, stress, and transition.