Why inventory blocks SME liquidity
For many Swiss SMEs — wholesale trade, distribution, manufacturing, import-export — inventory represents a significant share of working capital. Goods purchased and paid for, but not yet sold, remain tied up on the balance sheet until they are transferred to the customer. In the meantime, the company must cover wages, rent, suppliers, and operational investments.
The most common temptation is to extend payment terms to customers or rely on trade credit. Both approaches, however, have side effects: they increase default risk, complicate collections, and can strain commercial relationships. There is a less invasive alternative: financing the inventory itself, using stock as collateral to obtain immediate liquidity from the bank.
In Switzerland, the most widely used instruments for this purpose are inventory financing and Lombard credit, a form of loan secured by registered movable assets. This guide explains how they work, what requirements banks impose, and how to manage them correctly in accounting.
Inventory financing and Lombard credit: what they are
Inventory financing is a loan or credit line linked to the value of inventory. The bank advances a percentage of the goods' value — typically between 50% and 80% — and uses the stock as tangible collateral. The amount available varies depending on the type of goods, turnover, and inventory quality.
Lombard credit (Lombardkredit) is an established variant in the Swiss banking market: a loan secured by easily marketable movable assets, especially securities, precious metals, and, in some cases, inventory. The name derives from Lombard banking tradition, but today it is a standard product offered by cantonal banks, cooperative banks (Raiffeisen), and specialized financing institutions.
The practical difference for an SME: in inventory financing, the advance is calculated directly on inventory value; in the broader Lombard credit, stock may be one of several movable assets in a collateral package. In both cases, the bank holds a pledge (Pfandrecht) over the goods until the debt is repaid.
Inventory financing
Credit line tied exclusively to inventory. Suitable for distributors and traders with standardized inventory, predictable turnover, and straightforward valuation. Periodic inventory inspection by the bank or a custodian.
Lombard credit
Loan secured by registered movable assets (stock, securities, other valuables). Greater flexibility in the composition of collateral. Often used by SMEs with mixed assets (inventory + financial investments) seeking a single financing structure.
Comparison of the main sources of liquidity
Before pledging inventory as collateral, it is worth evaluating the alternatives available to a Swiss SME:
| Instrument | Collateral | Indicative cost | Commercial impact |
|---|---|---|---|
| Inventory financing / Lombard | Inventory (pledge) | CHF 3'000–8'000/year (fees) + interest 1.5%–4% | None for customers — commercial relationships remain unchanged |
| Factoring / receivables assignment | Trade receivables | 0.5%–2% of assigned turnover + interest | The factor contacts customers; possible reputational impact |
| Bank overdraft (current account) | Personal guarantees, mortgages, no specific collateral | Interest approx. 7%–10% on overdraft balance | Neutral, but high costs and often low limit |
| Extended supplier payment terms | None (trade credit) | Free if within agreed terms | Risk of losing cash discounts or preferential terms |
| Operating lease of goods | Leasing company retains ownership | Monthly lease payment + implicit interest | Reduces own inventory; suitable for high-turnover goods |
The distinctive advantage of inventory financing is that it does not alter customer relationships nor require assigning future receivables. Liquidity comes from an asset already on the balance sheet, without increasing equity risk from external sources.
How the process works in practice
The typical path for an SME activating inventory financing or Lombard credit in Switzerland follows these steps:
Inventory analysis
The bank assesses the type of goods (standardized vs. custom), average turnover, obsolescence, and accounting valuation method. Perishable, customized, or hard-to-sell goods receive lower advance percentages — or are excluded entirely.
Pledge agreement and credit line
A pledge agreement (Art. 884 et seq. CO) is executed over the inventory. The bank grants a credit line with a maximum limit calculated on eligible inventory value, applying a haircut (security margin) of 20%–50%. The company can draw and repay freely within the limit.
Periodic monitoring and reporting
The bank requires periodic inventory reports — monthly or quarterly — listing stock, values, and movements. In some cases, an independent custodian (warehouse keeper) physically holds the goods or verifies their existence through sample audits.
Dynamic adjustment of the credit limit
The credit limit adjusts to the current inventory value. If sales reduce stock, the limit decreases and the bank may require partial repayment. Conversely, seasonal restocking increases available financing capacity.
Banking requirements and costs for Swiss SMEs
Cantonal banks and specialized institutions apply similar criteria, though with some flexibility:
| Requirement | Detail |
|---|---|
| Minimum inventory volume | Generally CHF 100'000–250'000 in eligible inventory |
| Advance ratio (LTV) | 50%–80% of net realizable value; standard goods at 70%–80%, specialized goods at 50%–60% |
| Interest rate | SARON + margin (approx. 0.75%–2.5%) or fixed rate; indicatively 1.5%–4% in 2026 |
| Fees | Annual management fee CHF 1'500–5'000; inventory appraisal costs CHF 1'000–3'000 |
| Term | Revolving line of indefinite duration, with annual review of the limit |
| Accounting and reporting | Certified or reviewed financial statements; permanently updated inventory; ERP software with full traceability |
| Preferred sectors | Wholesale trade, non-perishable food products, building materials, components, automotive and spare parts |
| Excluded or penalized sectors | Seasonal fashion, consumer electronics, pharmaceutical products, perishable goods, goods held on consignment |
Accounting under Swiss standards
Inventory financing and Lombard credit have direct implications for statutory accounting and the SME's balance sheet. Correct recording is essential both for audit purposes and for compliance with the Code of Obligations (Art. 957 et seq. CO) and Swiss accounting standards (Swiss GAAP FER / OR).
Recording the debt: the amount drawn on the credit line is recorded on the liabilities side as short-term bank debt (account 24xx). Accrued interest is recorded as a financial expense (account 69xx) and is generally tax-deductible as an operating expense, as it is connected to business activity (subject to thin capitalization rules under Art. 65 LIFD for debts to shareholders or related parties).
Treatment of inventory: pledged goods remain recorded on the company's balance sheet assets (account 12xx — Inventory). The pledge does not involve a transfer of ownership: the SME retains obsolescence and impairment risk. Any value adjustments (Art. 960c CO) must be applied regardless of the existence of the financing.
Notes to the financial statements: under Art. 961 para. 2 CO and Swiss GAAP FER 6 (Notes), debts secured by a pledge over inventory and the related restrictions on assets must be disclosed in the notes, stating the amount of the debt and the nature of the collateral provided. This ensures transparency for auditors, banks, and cantonal tax authorities.
Simplified accounting example
A Ticino-based distributor with CHF 400'000 in inventory obtains a Lombard line at 70% (CHF 280'000). At quarter-end, it draws CHF 180'000 to pay for seasonal restocking:
- Disbursement: Debit Bank (1020) CHF 180'000 / Credit Bank debt (2400) CHF 180'000
- Quarterly interest (3.2% p.a.): Debit Interest expense (6950) CHF 1'440 / Credit Bank (1020) CHF 1'440
- Inventory: remains unchanged on account 1200 — CHF 400'000 (unless adjusted)
- Notes: «Bank debt secured by pledge over inventory: CHF 180'000»
Reliable inventory: a prerequisite for obtaining and maintaining financing
Swiss banks do not finance approximate inventory. To access a stock or Lombard line — and to avoid sudden reductions in the credit limit — the company must demonstrate rigorous control of inventory. This means periodic physical counts, alignment between ERP and accounting, and traceability of every inbound and outbound movement.
Integrated accounting software such as Accountex links warehouse movements to accounting entries in real time. When every purchase, return, and sale automatically updates inventory, the inventory value on the balance sheet matches operational reality — a fundamental requirement for the reports the bank requests monthly or quarterly.
Furthermore, well-maintained statutory accounts facilitate calculation of net working capital and the quick ratio, indicators the bank uses to assess the company's overall financial strength, beyond inventory value alone.
Consistent valuation
FIFO or average cost method applied uniformly across ERP and financial statements, as required by Art. 960c CO and Swiss GAAP FER 17.
Periodic reconciliation
Monthly comparison between physical stock, ERP, and account 1200. Variances documented and corrected promptly.
Bank reporting
Quick extraction of inventory value by category, with movement history for reporting to the financing bank.
Risks to consider before proceeding
Inventory financing is not without risks. An SME must assess them carefully before pledging stock:
- •
Credit limit reduction: if sales decline or inventory is written down, the bank reduces the credit limit and may require immediate repayment of the difference — a liquidity risk to anticipate in cash flow planning.
- •
Fixed costs: management and appraisal fees are payable even if the line is unused. For smaller amounts, the effective annual cost can exceed 6%–8% of the capital drawn.
- •
Operational restrictions: the pledge agreement may restrict free disposal of goods (below-cost sales, warehouse transfers, assignment to third parties) without bank consent.
- •
Enforcement: in case of default or bankruptcy, the bank has the right to realize pledged goods to satisfy the claim (Art. 891 CO; Art. 41 and 151 et seq. LEF), regardless of the carrying value recorded.
- •
Overstocking: easy access to credit can encourage excessive inventory purchases, worsening turnover and increasing obsolescence risk — exactly the opposite of the intended effect.
When it makes sense — and when it doesn't
Favorable scenarios
- Pronounced seasonality with pre-sales purchasing peaks (Christmas, summer construction, agricultural campaigns)
- Standardized inventory with predictable turnover and value > CHF 200'000
- Rapid growth exceeding self-financing capacity, but with solid operating margins
- Short-term liquidity needs without extending payment terms to strategic suppliers
- SMEs seeking to avoid factoring so customers are not involved in the collection process
Unfavorable scenarios
- Obsolete or declining inventory — the bank will apply high haircuts or refuse financing
- Thin operating margins: financing costs erode net profit
- Imprecise or unreconciled inventory accounting — the bank will not grant the line
- SMEs with inventory below CHF 100'000: fixed costs make the arrangement uneconomical
- Sectors with high obsolescence (fashion, tech) where impairment risk outweighs the benefit
Operational checklist for activating financing
Before submitting your application to the bank, verify that you have the following items in order:
| Document / Action | Required status |
|---|---|
| Updated physical inventory (last 3 months) | Mandatory — with listing by category and unit value |
| Balance sheet and income statement for the last 2 fiscal years | Mandatory — certified or with limited review |
| Business plan with cash flow projections | Recommended — especially for first application or limit increase |
| Documented inventory valuation method | Mandatory — consistent with financial statements and Art. 960c CO |
| ERP / accounting reconciliation | Mandatory — maximum variance of 2%–3% acceptable |
| Warehouse goods insurance policy | Recommended — often required by the bank as a condition |
| Comparison of offers (min. 2–3 banks) | Recommended — margins and fees vary significantly |
Liquidity from inventory, without compromising customer relationships
Inventory financing and Lombard credit offer Swiss SMEs a channel to convert inventory into operating liquidity, without extending trade credit to customers or assigning receivables to a factor. They are mature instruments, rooted in Swiss pledge law and widely used by cantonal and cooperative banks.
The decisive prerequisite is not company size, but the quality of inventory management and accounting. Tracked, correctly valued, and periodically reconciled inventory not only facilitates access to credit, but also reduces the risk of unexpected write-downs and improves visibility into the company's true liquidity.
Before activating a line, compare at least two bank offers, simulate the impact on quarterly cash flow, and verify that total cost (interest + fees) remains below the operating margin generated by the financed goods. With solid statutory accounts and software that links warehouse and balance sheet, inventory financing becomes a predictable instrument — not an unknown — for managing growth.