Buying Inventory Before You Have Customer Orders: How Much Is Safe?

A distributor often needs inventory before a customer is ready to buy it. Popular items can sell quickly, but there is no signed customer order guaranteeing that the next shipment will move on schedule. The business still has to pay its supplier, store the products and cover other bills while it waits.

Before financing another stock purchase, build a plan around how much cash leaves now, how fast the stock could sell and when the sales money actually arrives.

Why inventory without a confirmed order is a different decision

A confirmed customer purchase order gives the seller evidence of a particular sale, although payment and fulfilment can still go wrong. Stock bought for future demand is different. The distributor is making a forecast: it expects customers to buy, but it does not know exactly when or how much they will take.

That difference affects how an owner should think about the purchase. Purchase order financing may be considered for particular confirmed orders, while inventory financing concerns goods that a business needs to buy or hold. Lender terms and eligible inventory differ. Our purchase-order versus inventory guide explains the product distinction in greater detail.

A stock purchase that may take longer to sell

Imagine a Canadian wholesaler considering a $120,000 restocking order. It expects to sell the products over three months. The following numbers are invented and do not include borrowing costs or income tax.

In this simplified example, the owner spends $120,000 before collecting any money, and later collects $150,000 of sales. The $30,000 difference is gross margin before storage, staffing, financing and other costs, not profit or available cash on day one.

Now suppose sales arrive a month late. The first $50,000 of customer receipts may no longer arrive in Month 1, but the supplier's $120,000 bill is still due. That one change matters even if the products eventually sell for the same amount. Another risk is unsold stock: the business may need to discount some goods, tie up cash longer or pay storage costs.

Use turnover to test the forecast

Inventory turnover describes how often a business sells and replaces its stock over a period. One common calculation is the cost of goods sold divided by average inventory value. BDC explains that this can help an owner judge how quickly money tied up in products may become available again. ^[1]

If a company has $600,000 in annual cost of goods sold and an average $150,000 of inventory at cost, its turnover is 4 times per year. That corresponds to about 91 days of inventory using 365 ÷ 4. This is a backward-looking average, not a promise that a new shipment will sell in 91 days.

Compare the number with the products you actually plan to buy. Fast-moving basic supplies and slow-moving specialized items shouldn't necessarily get the same sales forecast. Look at recent sales, returns, stale stock and which customers buy each item.

What if the products don't sell as planned?

A good decision includes a slower case. Ask how much cash is needed if the next shipment sells at half the expected pace, if customers take 60 days to pay instead of 30, or if you must discount products to clear space.

Check whether the supplier allows smaller deliveries, different payment dates or partial orders. Review freight, storage and insurance costs, because the purchase price isn't the only money tied up in inventory. If the products are perishable, seasonal or hard to resell, the downside deserves even more attention.

What financing information may matter?

A lender may look at purchase invoices, stock records, sales history, customer concentration, the age of existing inventory and the business's ability to repay if sales slow. Some providers may consider inventory as part of a security package; others may not lend against certain goods at all. Avoid assuming that the dollar value on a stock report equals the amount a lender would advance.

BDC's inventory guidance also stresses the importance of planning inventory purchases and maintaining enough available cash for unexpected business costs. ^[2]

BGC is a Canadian financing broker, not a direct lender. We can review a request for inventory financing and explore available options with selected funding partners. If you are still deciding how much cash you need, our working-capital forecasting guide shows a simple method. You can also apply for financing; approval, product fit and repayment terms depend on the provider and the business.