Abstract: The risk caused by demand fluctuation is the main risk of inventory financing that differs from other kind of financing.The decision of loan-to-value ratio of inventory financing is analyzed under the assumptions of endogenous default risk and stochastic demand.Firstly,the optimal loan-to-value ratios of the bank under different risk preference are given.It is proved that the optimal decisions under risk averse and loss averse are all smaller than that of risk neutral.Then,we derive the optimal loan-to-value of the bank when his decision will influence the firm's inventory decision.Finally,the numerical study is given to demonst rate the conclusions.

Key words: inventory financing, loan-to-value ratio, mean-variance model, loss aversion