I often start hearing sellers talk about taking on some form of debt this time of year.
It’s time for inventory orders for the holiday season, the cash from last month’s sales is already spoken for, and a credit line is sitting right there.
Borrowing again is a reasonable move – sometimes.
It’s a quick way to keep product moving, and most owners I talk with have done it more than once.
Why borrowing to fund inventory becomes a cycle
The problem is that this creates a cycle, that runs the same way each time.
Revenue comes in, it goes to operating expenses and debt payments, and then there’s nothing left for the next order, so you borrow again.
Step 1: Open a Profit First Inventory account
Breaking this cycle starts with a Profit First Inventory account.
It pre-funds your next order from current sales, even if you can only cover half of it at first, because that’s half of the order you no longer have to borrow for.
Step 2: Review your low-margin products
Looking at your product portfolio is the next step.
Low-margin products are the biggest cash trap, since they use up inventory dollars without earning enough margin to replace them.
Step 3: Negotiate better supplier terms
Then, talk to your supplier about longer payment windows, smaller minimum orders, even 0% financing.
It’s all worth asking about because manufacturers want to keep your business and many will work with you.
Work on one of these things this week and see where you can get.
If you have questions on how to get started, book a call with our team and we’ll talk about it.
Cyndi
Quick Summary
- The problem: Borrowing to fund inventory works in a pinch, but when sales cash goes to expenses and debt payments, there’s nothing left for the next order, so sellers borrow again.
- Step 1: Open a Profit First Inventory account that sets aside a portion of current sales to pre-fund your next order. Covering even half means borrowing half as much.
- Step 2: Review your product portfolio. Low-margin products tie up inventory dollars without earning enough to replace themselves.
- Step 3: Ask suppliers for longer payment terms, smaller minimum order quantities, or 0% financing.
- Next move: Pick one step and work on it this week.
Frequently Asked Questions
Is it bad to borrow money to fund inventory?
Not always. Borrowing to fund inventory can be a reasonable short-term move, especially before a busy season. It becomes a problem when it turns into a cycle, where every order depends on new debt because sales cash is already used up by expenses and loan payments.
What is a Profit First Inventory account?
A Profit First Inventory account is a separate bank account where an ecommerce business sets aside a percentage of every sales deposit specifically for future inventory purchases. Over time, it pre-funds your next order so you rely less on credit lines and loans.
How do I start pre-funding inventory if cash is tight?
Start small. Even if your Inventory account only covers part of your next order, every dollar saved is a dollar you don’t have to borrow. Increase the percentage you set aside as your cash flow improves.
Why are low-margin products a cash trap?
Low-margin products use up inventory dollars without generating enough gross margin to replace that stock and cover operating costs. Cutting or repricing them frees up cash for your best-performing products.
What should I ask my supplier to improve cash flow?
Ask about longer payment windows (such as net 30 or net 60), smaller minimum order quantities, deposit-and-balance terms, or 0% financing. Many manufacturers want to keep good customers and are open to negotiating.
Related reading: How Do I Set Aside Cash From Product Sales to Pay for Future Inventory? | How Do I Forecast Inventory Payments and Ordering Timing? | Am I Using Debt Strategically or Just to Survive? | How Do I Pay Down Debt Using Profit First?
