Wholesale business loans and working capital for distributors

A wholesaler earns a small margin on a large volume. Net profit of a few pence in the pound means the business is funding stock and customer credit with money that turns over many times a year, and any slowdown in that turn shows up in the bank account quickly. Typical pressures include:

• Bulk buys and deals. Suppliers offer better prices for full pallets, full containers or forward orders, but only if you pay for them.
• Retrospective rebates. Volume rebates from manufacturers are often paid quarterly or annually in arrears, so the margin you priced on arrives months later.
• Import payment terms. Overseas factories commonly want a deposit when the order is placed and the balance before shipment, leaving months between paying and selling.
• Trade credit to customers. Independent retailers, caterers and trade accounts expect 30 days or more, and some pay late.
• Seasonal peaks. Christmas stock, summer drinks and garden lines are bought well ahead of demand.

The cash conversion cycle shows how long each pound is tied up between paying a supplier and being paid by a customer:

Cash cycle (days) = stock days + debtor days − creditor days

Illustration only, with round hypothetical figures. If stock sits for 45 days, customers pay in 40 days and suppliers allow 30 days, the cycle is 45 + 40 − 30 = 55 days. A wholesaler turning over £6 million a year has roughly £900,000 of cash tied up at any time (£6 million ÷ 365 × 55). Winning a new customer worth £1.2 million a year adds around £180,000 to that figure before the first extra invoice is paid.

The components tell you which finance helps most. Long debtor days point to invoice finance; long stock days point to stock finance or clearing slow lines; short supplier terms on imports point to trade finance. Our guide to calculating working capital goes further.

• Alcohol. Businesses selling alcohol wholesale must be approved under the Alcohol Wholesaler Registration Scheme, and customers must check their suppliers' registration. Lenders will want to see your AWRS number and, for bonded stock, how duty is paid.
• Tobacco and high-value goods. Theft risk and tight margins mean lenders look at security arrangements and insurance.
• Grocery and foodservice. Short-dated and chilled stock supports little borrowing, but these businesses often have a broad, reliable debtor book.
• Trade distribution. Builders' merchants and parts distributors carry long product ranges and a large number of small trade accounts; see our page on builders merchant finance.
• Online marketplaces. Wholesalers selling through marketplaces have payouts held back by the platform, which lenders treat differently from trade debtors.

Before borrowing to buy in bulk, check that the discount outweighs the finance cost for the time the stock is likely to sit. A 5% bulk discount on stock that takes six months to sell may not survive the cost of funding it, storage and the risk of clearance pricing. Other steps can shorten the cycle without borrowing:

• Negotiating longer supplier terms, or consignment stock on slower lines
• Tightening credit control and charging statutory interest on late commercial payments where appropriate
• Clearing aged stock, even at a loss, to release cash
• Collecting rebates promptly and building them into forecasts

Most working capital facilities for smaller wholesalers need a director guarantee, and an invoice finance debenture will affect other borrowing, so understand the security before you sign.