Financing Inventory in India: Choosing the Right Debt Line

Start with the cash gap, not the loan

Most sellers ask which lender to use before they know how much they need or for how long. Work the gap first. Add inventory days and receivable days, then subtract payable days.

A typical India multichannel brand holds 75 days of stock, waits about 12 days for marketplace settlement and 45 days for modern trade or quick commerce payments, and pays suppliers in 30 days. The blended gap lands near 70 to 90 days. Every rupee of monthly cost of goods sold therefore needs roughly two and a half to three rupees of standing working capital.

That number, not the lender brochure, sets the size of the facility. And size it at peak. A brand that builds 60 to 75 days of cover before Diwali needs its largest limit in August, not in March.

The instruments actually available

Five structures cover almost every case in India.

• Cash credit or overdraft against stock and book debts. Bank funded, secured by hypothecation, roughly 9 to 11.5 percent a year, with drawing power reset every month off a stock statement.
• Unsecured term loan from an NBFC. 16 to 24 percent a year, 12 to 36 month tenor, money in a week, no stock reporting.
• Revenue based financing. You take Rs 50 lakh and repay Rs 53 to 56 lakh over six to nine months as a slice of daily collections. The 6 to 9 percent fee is not the rate. On a falling balance the effective cost sits near 20 to 30 percent a year.
• Trade instruments for imports. A usance letter of credit or buyer credit funds the shipment for 90 to 180 days at 7 to 10 percent all in, and pushes the payable date past the sale date.
• Invoice discounting, including TReDS for bills drawn on large listed buyers. 8 to 12 percent a year, no fresh collateral, useful when a chain owes you 45 to 60 day money.

Marketplace linked advances sit between these. They are fast and settlement secured, usually 14 to 20 percent a year, and the limit shrinks when sales shrink. That is the wrong direction for a recovery.

Convert the rate into cost per turn

An annual rate means nothing until you divide it by inventory turns. Cost of financed stock per turn equals the annual rate divided by turns.

At 24 percent a year and four turns, financing costs 6 percent of cost of goods per turn. If contribution after channel fees, freight and returns is 18 percent of net revenue, that trade works. At two turns the same money costs 12 percent per turn, and you are borrowing to hold stock that is not moving.

Run this test by SKU class, never on the blend. Fast movers at eight turns can carry expensive money comfortably. A long tail at 1.5 turns cannot carry any of it.

What underwriting actually looks at

Build the file once and reuse it. Lenders in this segment ask for the same eight things: 12 months of bank statements, 24 months of GST returns, two years of audited financials, marketplace settlement reports, a stock statement with ageing, debtor ageing, promoter bureau records above 700, and a personal guarantee.

Two ratios usually decide it. Bank funded lines want interest cover above 2 and total debt to EBITDA below 3. NBFCs care more about collection stability and bounce history. One cheque return in the last six months costs you more than a weak margin year.

For secured lines, understand drawing power before you sign. Stock older than 90 days, goods in transit and creditor funded stock get deducted, then a margin of 20 to 25 percent is applied to the rest. Founders are regularly surprised that Rs 3 crore of inventory supports only about Rs 1.4 crore of drawing.

Sequence the stack as you scale

Below roughly Rs 5 crore of annual revenue, the cheapest capital is your supplier. Paying 2 percent more per unit for 45 day credit is far cheaper than 24 percent money, and it never appears on your balance sheet.

From Rs 5 crore to Rs 25 crore, hold one bank overdraft for the permanent base and use short NBFC or revenue based money only for the festive build, then retire it by January. Above Rs 25 crore, split the stack deliberately: bank line for permanent working capital, letters of credit for imports, invoice discounting for large buyer receivables, and one unused emergency limit kept open.

Where this goes wrong

Four failures repeat. Sellers stack three revenue based facilities until daily deductions take 14 percent of collections and payroll gets squeezed. They fund the long tail because the limit was sitting there. They use a 12 month term loan for a need that never ends, which forces a refinance every year at whatever rate the market is offering. And they breach drawing power quietly, which triggers penal interest and a review at the worst possible moment.

One control prevents most of it. Publish a weekly one page cash view: opening balance, expected settlements by date, supplier payments due, facility limit, drawing power and headroom. Read it every Monday with the founder and the accountant. Debt discipline is a reporting habit long before it is a financing decision.