Wholesale funding: buying in bulk, selling on terms, living on thin margins

Wholesale and distribution businesses move a lot of money for a small slice of it. You pay suppliers upfront or on short terms, hold the stock, then sell to retailers and restaurants on longer terms. Growth eats cash, and margins are too thin to pay for expensive funding. That narrows the right answers quickly.

The cash-flow shape of a distributor

• High volume, thin margin. Large sums pass through the account. A funder sees big deposits; you see the small part that's actually yours.
• Stock before sales. You buy in bulk to get the price, sometimes ahead of a season, and carry it in a warehouse until it's ordered.
• Selling on terms. Retail and trade customers usually expect invoice terms, so cash arrives weeks after delivery.
• Supplier terms that don't match. If you pay suppliers faster than customers pay you, every extra sale widens the gap.
• Fixed costs that scale in steps. A new warehouse, a truck, a forklift fleet, a new warehouse management system.

The test for any funding here is simple: can the margin on the goods carry the cost of the money?

Which funding fits, and which doesn't

A line of credit is the wholesaler's main tool. You draw it when the container arrives and repay as customers pay. SBA 7(a) loans can also cover working capital as well as equipment and real estate, through a participating lender.

A merchant cash advance is built for card-heavy businesses with healthy margins. A distributor usually has neither.

What it costs: a worked example

Say you need $100,000 to fund a bulk purchase.

As a term loan at 18% APR over 24 months, paid monthly: $4,992.41 a month, $119,817.84 in total, $19,817.84 interest. In practice a line of credit repaid as stock sells would cost less, because you'd carry the balance for months, not two years.

As a cash advance at a 1.15 factor over 6 months, paid daily: $115,000 back, 126 payments of about $912.70, a cost of $15,000, and about 57% APR.

Now put that against the goods. If the stock you bought with $100,000 sells for a gross profit below $15,000, the advance cost more than you made. Before you take any offer, compare its total cost with the gross profit on what it funds. The borrowing calculator on this page shows what your deposits can support.

Sterling's take: in wholesale, compare the cost of money with your margin, not with your revenue.

What funders typically ask a distributor for

• Business bank statements for recent months.
• An accounts receivable aging report and a customer list.
• An inventory report, ideally with how fast each line turns.
• Supplier terms and any open purchase orders.
• Financial statements and tax returns for larger lines or loans.
• A schedule of existing debt.

Our funding partner's programs suit distributors trading 12 months or more with about $80K a month in deposits, an owner credit score of 600+ and no more than two loans or advances running.

Red flags specific to wholesale

1. Big deposits, small margin. Funders sometimes size offers to deposits. A big offer on big pass-through volume can carry payments your margin can't support. Size it to gross profit.
2. Slow-moving stock. Borrowing to buy more of a line that isn't turning ties expensive money up in a warehouse.
3. Debits outside the contract. The FTC has acted against cash advance providers that debited more than they disclosed. High-volume accounts make extra debits harder to spot, so reconcile monthly.

Before you sign

Calculate your cash conversion cycle: days to sell stock, plus days to collect, minus days you get from suppliers. That's how long you carry each dollar, and it tells you what kind of money you need.