Inventory Financing Agreement Template for Canada

An Inventory Financing Agreement is a specialized commercial lending document that allows your business to use inventory assets as collateral for a revolving credit facility. Under Canadian law, this agreement must comply with both federal legislation like the Bank Act and provincial Personal Property Security Acts to ensure proper security creation and registration.

When do you need this document?

You need this agreement when your business maintains significant inventory levels and requires ongoing access to working capital. It's essential for manufacturers who need funds to purchase raw materials, distributors managing seasonal stock fluctuations, and retailers financing inventory purchases ahead of peak sales periods. The agreement becomes particularly valuable when traditional term loans don't provide the flexibility your business needs to match borrowing with inventory cycles. You'll also require this document when expanding operations, entering new markets, or managing cash flow gaps between inventory purchases and sales.

Key legal considerations

The agreement must include a comprehensive security interest grant covering your inventory and related assets, with specific PPSA compliance provisions for registration and perfection. Key clauses include detailed definitions of eligible inventory, advance rates, borrowing base calculations, and reporting requirements. You need clear terms governing inventory valuation methods, eligibility criteria that exclude obsolete or damaged goods, and specific provisions for cross-default triggers. The document should address lender inspection rights, insurance requirements, and detailed events of default. Consider including provisions for inventory rotation, seasonal adjustments, and procedures for handling inventory disposal or write-downs that could affect borrowing capacity.

Legal requirements in Canada

In most Canadian provinces, you must comply with the Personal Property Security Act (PPSA) for creating, perfecting, and enforcing security interests in inventory. This requires proper registration of financing statements and adherence to specific priority rules. Quebec follows different rules under the Civil Code, requiring registration in the Register of Personal and Movable Real Rights. If your lender is a chartered bank, federal Bank Act provisions may apply, potentially providing enhanced security rights under sections 427-429. You must ensure compliance with provincial consumer protection laws if applicable, and consider Bankruptcy and Insolvency Act implications for creditor priorities. The agreement should include specific Canadian tax considerations, including GST/HST implications for inventory financing and potential deemed trust provisions.