Wholesale & Distribution Funding

Distributors live in the middle: they buy from manufacturers, often on tight terms or even prepaid, and sell to retailers, restaurants or contractors who ask for 30, 45 or 60 days to pay. In between they hold stock, run a warehouse, pay drivers, and absorb freight. The margin on each unit may be modest, so volume matters, and volume consumes working capital.

A new customer that orders in large quantity is the best problem to have, and often the hardest to fund. This page covers the cash cycle of a distributor, how to size your working capital need, and the funding approaches that tend to fit.

The cash cycle in numbers

Three timelines determine how much cash a distributor needs: how long inventory sits, how long customers take to pay, and how long you have to pay suppliers. If you hold stock for 40 days, collect in 55, and pay suppliers in 20, you finance roughly 75 days of operations yourself.

Each extra dollar of sales then needs about 75 days of cost funded in advance. Say your cost of goods is $200,000 a month. Carrying 75 days of that is roughly $500,000 in working capital, before overhead. Growth makes it larger. This is why profitable distributors can be cash poor.

• Days of inventory on hand
• Days sales outstanding on customer invoices
• Days payable to suppliers
• Freight and warehouse costs in between

Large purchase orders and customer terms

When a chain or institutional buyer places a large purchase order, you may need to buy all the inventory before shipping. If the customer then pays on net-60, you are out of pocket for months. Purchase order financing and short-term working capital are two approaches distributors consider; each depends on the customer's credit and the order's margin.

Before accepting, compare the margin on the order to the cost of funding. A 12 percent gross margin order that costs 8 percent to finance leaves little room for error, and a late payment erases it.

Warehouse, freight and fleet

Growth shows up in square footage and trucks. A larger warehouse, racking, forklifts, a loading dock and delivery vehicles are long-lived assets that are often financed with the equipment as collateral. Rising freight costs hit margins directly, so some distributors bring delivery in-house, which in turn requires vehicles and drivers.

Match each need to its structure: equipment financing for racking and trucks, working capital for stock and receivable gaps. A funding specialist at Fidelity Funding can help sort which belongs where.

A worked example: a big new account

Say a distributor wins a regional account that will order $120,000 of product per month on net-60 terms. At a 20 percent gross margin, the monthly gross profit is $24,000, but the distributor must pre-purchase $96,000 of goods each month and wait about two months for payment, meaning roughly $192,000 may be outstanding at steady state.

If the distributor takes a $100,000 advance at a 1.20 factor rate, total payback is $120,000. The $20,000 cost is real, but if it unlocks $24,000 per month in gross profit, the economics can work. If the customer pays late or the margin shrinks, they do not. Figures are illustrations; terms vary by funding partner and underwriting.

Credit risk on your customers

Selling on terms means taking credit risk. A customer that stretches payments from 60 to 90 days is quietly borrowing from you. Consider credit checks on large accounts, deposits on first orders, and early-payment discounts. Early-payment discounts can be costly, so calculate their annualized price before offering them, and consult your accountant.

Tightening the cycle before you borrow

Each day you shave off the cash cycle frees working capital. Offer a modest early-payment discount only if the math supports it, tighten credit approval for new accounts, invoice the day you ship, and follow up on every invoice before it becomes overdue. On the inventory side, review slow movers and set reorder points based on actual turn.

Supplier relationships matter. A distributor who pays reliably can often negotiate longer terms or volume rebates, which directly reduce the funding needed. Review your top ten suppliers each year and ask for better terms before you borrow to cover the gap.

A hypothetical weekly cash calendar

Imagine a distributor with $60,000 in weekly sales on net-45 terms, buying inventory on net-15. Each week it pays suppliers about $45,000, payroll and freight of $9,000, and collects nothing from that week's sales for six or seven weeks. Once the receivables pipeline fills, collections arrive steadily, but the gap during the first seven weeks of a new account can approach $380,000 of out-of-pocket cash. This is an illustration only.

That is why many distributors ramp new customers in stages: smaller first orders, deposits on special items, and a defined credit limit. Pairing staged growth with a working-capital advance sized to the first two or three weeks can be safer than financing the whole pipeline at once. Always compare the total payback against the gross profit on the first few orders.

The Fidelity Funding application is short, and the initial review uses a soft credit pull only, so your score is not affected. A funding specialist reviews options with you, decisions can often come within hours, and funding often within about 24 hours once approved, depending on the funding partner. When a large order arrives with a short deadline, it helps to have already explored your options.

This article is for general information only and isn’t financial, legal or tax advice. Funding approval, amounts and terms are set by funding partners and depend on underwriting.