Finance for wholesalers and distributors

Wholesale is a volume business on thin margins. You buy big, sell on credit and make a few pence in the pound on each turn of the stock. That means finance has to be cheap relative to your margin and has to grow as your sales ledger grows. Most short-term finance fails the first test.

The cash-flow shape of a wholesaler

Two credit terms set your cash position: what your suppliers give you and what you give your customers. If suppliers want paying in 30 days and customers take 60, you finance the gap on every sale. For business-to-business deals an agreed payment date must usually be within 60 days.

On top of that sit:

• Bulk buys. Supplier discounts for volume, or price rises you want to beat, pull cash out in one go.
• Seasonal lines. Garden, gifting or catering stock ordered months before it sells.
• VAT. Returns and payments are due one calendar month and 7 days after the end of each VAT period. On high-turnover, low-margin trade, VAT figures can be large relative to profit.

The margin test

Finance cost comes straight out of gross margin. A worked comparison makes the point.

Say you borrow £50,000 to buy stock that turns in roughly 3 months and earns a 15% gross margin, £7,500 of gross profit.

• A cash advance at a factor rate of 1.10 over about 3 months, collected daily, costs £5,000, with 63 payments of £873.02. That is about 76% APR, and it takes two-thirds of the margin.
• The same £50,000 at a factor rate of 1.20 over about 6 months costs £10,000, more than the gross profit on the stock.

Sterling's rule of thumb calls 50–100% APR "expensive short-term money". In wholesale, it is usually money that eats the deal. The "how much can I borrow" calculator on this page gives a feel for what your turnover supports; the offer checker shows what any quote really costs.

Which finance fits, and which doesn't

• Invoice finance is the natural fit. It advances most of each invoice soon after you raise it, and the facility grows with your sales. Factoring includes collections; invoice discounting leaves them with you.
• Revolving credit facility: draw for a stock buy, repay as it sells, draw again.
• Working capital finance: a one-off bulk buy at a discount worth more than the finance costs.
• Asset finance: racking, forklifts, vans and warehouse systems.
• Usually not a fit: merchant cash advances. Trade customers rarely pay by card, and the price is high for a thin-margin trade.

What funders typically ask a wholesaler for

• An aged debtor list and an aged creditor list.
• Filed accounts and management accounts.
• Bank statements for the last several months.
• Stock reports, including slow-moving lines.
• Customer concentration and credit terms offered.

Invoice finance providers will also want to see your terms of trade and may check a sample of customers.

Red flags specific to wholesale

1. Finance that costs more than the margin. Divide the finance cost by the gross profit on the stock it pays for. If the answer is near or above 1, walk away.
2. Concentration limits in invoice finance. A provider may only fund a set share of any single customer's debt. If one buyer is most of your ledger, your facility may be smaller than it looks.
3. Slow stock counted as an asset. Lines that haven't moved in months are worth less to a funder than they are on your stock sheet.

Late payers can be charged statutory interest at 8% plus the Bank of England base rate on business-to-business debts, unless your contract sets a different rate.

Limited companies only

Ask Sterling only introduces limited companies, because introducing sole traders and small partnerships is regulated credit broking. Our funding partner doesn't take food brokers right now. That's on us, not you. Business finance for limited companies is not regulated by the Financial Conduct Authority.