Quick answer
Wholesalers and distributors buy stock in bulk, often from overseas, hold it in warehouses and sell to retailers or trade customers on credit. Cash is tied up at every stage, from supplier payment to customer receipt. Trade finance, invoice finance and lines of credit are the core tools, often combined. Lenders focus on stock turnover, customer quality, margins and concentration.
Key points
- Cash is tied up in imports, warehouse stock and customer receivables.
- Trade finance covers the buying side; invoice finance covers the selling side.
- Thin margins make finance costs and stock turnover critical.
- Customer concentration is a key risk lenders examine.
At a glance
- Typical needs
- Imports, warehouse stock, receivables, warehouse equipment
- Common facilities
- Trade finance, invoice finance, line of credit, equipment finance
- Lender focus
- Stock turnover, customer quality, margins, concentration
- Watch for
- Slow-moving stock and over-reliance on one retailer
Wholesale is a volume game played on thin margins. Distributors buy in quantity to get good prices, hold stock so customers can order quickly, and offer trade credit because customers expect it. Every one of those choices ties up cash. A growing distributor can need more working capital every month simply to keep up with orders.
The full cycle
| Stage | Cash tied up |
|---|---|
| Supplier payment | Deposits and balances, often before goods ship |
| Freight, duty and clearance | Landed costs before stock arrives |
| Warehouse stock | Goods waiting to be sold |
| Customer receivables | Invoices on 30 to 60-day terms |
Our guide to the working capital cycle shows how to measure each stage in days.
Finance that fits distribution
- Trade finance pays suppliers, often at shipment, with each drawing repaid after the goods sell.
- Invoice finance advances cash against customer invoices.
- Lines of credit cover recurring gaps and smaller purchases.
- Equipment finance funds forklifts, racking and delivery vehicles.
What lenders look at
Lenders focus on stock turnover, gross margin, the quality and spread of customers, debtor days and how much of the business depends on a few large accounts. Aged stock and receivables reports, along with financial statements, are standard requests for larger facilities.
Risks to manage
- Slow-moving stock. It ties up cash and may need discounting to clear.
- Customer concentration. Losing one major retailer can upend cash flow and covenants.
- Currency and freight costs. Both can change the true cost of imported goods.
- Thin margins. Finance costs must be priced into every product line.
Supplier early-payment discounts can sometimes outweigh the cost of finance; our guide to paying suppliers early for discounts explains how to check.
An illustrative example
A made-up kitchenware distributor imports from several overseas factories and sells to independent retailers on 45-day terms. It uses trade finance to pay at shipment and invoice finance on retailer invoices. A quarterly review of slow-moving lines lets it reduce stock levels and the size of facility it needs, cutting finance costs without slowing sales.
Strengthening a distribution application
Distribution lenders want to see a well-run inventory and receivables machine. Bring financial statements, aged stock and debtor reports, a summary of your main suppliers and customers with terms, and a forecast of orders for the coming months. If you import, include typical shipping times and how you manage currency.
Show margins by major product line or customer if they differ. Lenders understand that distribution margins are thin; what reassures them is evidence that you know exactly where profit comes from and where cash is tied up.
Questions to ask before you borrow
- What are the total per-transaction and facility fees across a full year of orders?
- Are there concentration limits on any single customer in the invoice facility?
- Can the trade facility fund freight and duty as well as supplier invoices?
- How quickly does each major product line sell through?
Finance for your distribution business
If imports, stock and customer terms are stretching your cash, a combination of facilities can carry the whole cycle. To explore options, make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a crowd. Tell us your order cycle, customer terms and monthly sales in your enquiry.
Frequently asked questions
Can I use trade finance and invoice finance together?
Yes. Many distributors use trade finance to pay suppliers and invoice finance to draw against customer invoices, covering the full cycle.
How do lenders treat warehouse stock?
Stock has some security value but is usually heavily discounted. Lenders focus more on how quickly it sells and the receivables it creates.
What if one customer is most of my sales?
Concentration raises risk. Invoice finance providers may cap how much of the facility one customer can represent, and lenders may ask about contract terms with that customer.
Can warehouse equipment be financed?
Forklifts, racking, vehicles and packing equipment are commonly financed through equipment finance, with the assets as security.
How do I reduce the cash tied up in stock?
Improve forecasting, negotiate longer supplier terms or consignment, reduce slow-moving lines and review minimum order quantities.
Sources and further reading
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