Builders' merchant finance for stock, trade credit and yards

A merchant sits between manufacturers who want paying on time and contractors who expect a trade account. Most trade customers buy on a monthly account, settled at the end of the month following the invoice, and many stretch it further when their own main contractor pays late. On the other side, suppliers of timber, blocks, plasterboard and insulation set their own credit limits and terms, and the best prices often depend on paying promptly or buying in volume.

That leaves the merchant financing three things at once: stock in the yard and racking, credit extended to hundreds of trade accounts, and the vehicles and handling equipment that move both. Margins on heavyside and commodity lines are thin, and a slice of the profit arrives later as retrospective rebates from suppliers or a buying group. When building activity picks up, the business needs more cash, not less, because the ledger and the stock grow before the profit lands.

• A supplier offers a forward-buy or price-protected deal on timber or insulation ahead of an announced price rise.
• The sales ledger has grown faster than the bank overdraft, with trade debtors stretching past their terms.
• Replacing a delivery fleet of flatbeds and tippers, or adding lorry-mounted cranes so blocks and bags can be set down on site.
• Buying the freehold of a branch yard currently held on a lease, or acquiring a neighbouring site to extend.
• Opening a new branch, which needs opening stock, racking, a trade counter and staff before it produces income.
• Buying out a retiring founder or acquiring a competitor's branch, often with a stock valuation and a debtor book to take over.
• A large contractor customer fails, leaving a bad debt and a hole in working capital.

Merchants supplying materials only are generally outside the construction reverse charge, so they still charge VAT on their invoices in the normal way, while customers who buy a supply-and-fit service from the merchant may fall within it. HMRC sets out the boundary in its guidance on the VAT domestic reverse charge for building and construction services. Merchants that install, such as kitchen, window or heating merchants with fitting teams, should check which invoices fall where, because it changes the VAT they collect and hold. When a quarter's VAT bill lands in a quiet month, a VAT loan can spread it.

Unpaid trade accounts can carry statutory interest and fixed compensation under the late payment rules; GOV.UK explains how to charge interest on late commercial payments. Few merchants use them against regular customers, but knowing the right exists helps when a large account goes bad.

The biggest risk is funding growth in the ledger without tightening credit control. Invoice finance releases cash against debtors, but if a large customer fails the lender will expect the merchant to cover the loss on that invoice, unless the facility includes bad debt protection. Forward-buying stock on borrowed money only pays if the saving exceeds the cost of finance and the stock sells before the price falls back. Most facilities ask directors for personal guarantees, and an all-assets debenture is usual for invoice and asset-based facilities.

Alternatives deserve a look first: better supplier terms through a buying group, a tighter limit on slow accounts, or asking HMRC for a Time to Pay arrangement if a tax bill is the real pressure. Merchants supplying contractors working on staged contracts may find our sibling page on construction contract funding useful when talking to customers about how they fund their jobs.