The Cost of Financing Inventory

What does it really cost you to carry your inventory on credit.  Did you know that when a term like 2/10, net/30 is given, and you choose to wait till the end of the term to pay, it costs you as much as a loan that has an APR of 36.5%. In other words, if you are going to finance your inventory you are better off shopping around.

The annual rate is computed as follows:

Annual rate = Discount rate * (365 days / Term of the loan)

Using our example of 2/10, net 30, the number of days financed is 20days because there is a discount available for the first 10days it cannot be included in the financing days.  In other words, you are forgoing a 2% discount to obtain a 20 day loan.  Plugging in the numbers to the formula we get:

Annual rate = 2% * (365/20) = 36.5%

I strongly discourage debt even in business, there are ways you can plan where you don’t have to use debt to carry your inventory but if you must finance your inventory you are better off looking for better terms at a bank.