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Distributor Finance | What You Should Know
Specialist business finance allows you to optimise your funding options to tailor solutions to your need - distributor finance is no exception.
With a clearly defined goal of providing the funding required to secure stock for resale, distributor finance forms part of the suite of supply chain finance products that helps UK businesses operate smoothly.
What is Distributor Finance?
As the name suggests, distributor finance is structured to help distributors who are purchasing stock for resale. It is a funding solution that uses the stock as leverage to secure the financing, mitigating lender risk to provide lower interest rates and fees than many other business loan structures.
Distributor finance benefits both distributors and suppliers - providing upfront capital to secure stock, strengthening supplier relationships, and ensuring uninterrupted stock availability for wholesalers, retailers, and end customers.
For those businesses, other finance options such as stock / inventory finance is more suitable.
How Distributor Finance Works
Distributor finance provides capital directly to the supplier. The funds provided are ringfenced for this purpose and cannot be used for other applications.
Distributor finance can be set up as either a single loan or an ongoing revolving credit facility, with credit facilities more usual for their additional flexibility. In either case, the process is simple:
- Distributor applies for finance - With a range of specialist lenders and banks able to offer distributor finance for values from £5,000 to £5 million, Clifton Private Finance can help businesses of any size secure the funding they need.
- Lender makes a risk assessment - The fees and rates of distributor finance are tied to your risk profile as a distributor, and supplier vetting.
- Distributor finance offer confirmed - The finance is set up, with either a single loan approved or line of credit implemented.
- Payment is made direct to supplier - Distributor finance does not provide funds directly to you as the applicant. Funds are paid directly to the supplier immediately upon receipt of the invoice.
- Supplier ships goods - The stock is delivered to you.
- Stock is sold on - The distributor (you) sells stock over time.
- Repayments are made - You pay back the credit provided based on the pre-arranged flexible terms.
- Credit is released for future use (revolving credit facility) - If the distributor finance is set up as a revolving credit facility, the ability to leverage more credit for future use occurs immediately.
Read some of our latest case studies to see what we can achieve at Clifton Private Finance:
Is Distributor Finance Just a Business Loan?
How is distributor finance better than any business bank loan? It’s a reasonable question to ask, especially for distributor finance that’s set up as a one-off lump sum rather than an ongoing line of credit.
The answer is to do with the specialist structure. Distributor finance:
- …is short term - Unlike a standard loan that has repayment terms that span multiple years, distributor finance is a short-term solution, often with payment due within 60, 90, or 180 days.
- …has superior rates - By leveraging the stock as collateral for the loan, distributor finance is a form of asset-based lending that can enjoy superior interest rates thanks to the lowered lender risk.
- …has a flexible repayment structure - A business loan has a set monthly repayment, while distributor finance is more flexible, allowing you to repay the loan on a more ad-hoc basis as and when stock is sold on. In many cases, a month or longer can pass without any pressure to make a repayment.
- …pays the supplier directly - Distributor finance doesn’t provide ‘cash for any use’, but pays your supplier directly at the moment the invoice is presented. This has a number of benefits, including improving your standing and relationship with your supplier to secure discounts and preferable treatment.
- …shares risk - An unsecured business loan is entirely your risk with every repayment needing to be met even if the stock doesn’t sell that month. Unlike traditional loans, repayments in distributor finance are typically linked to stock turnover. This means if sales are slow, repayments are lower, giving your business more space to breathe during difficult periods.
Distributor Finance Structures
Distributor finance is available as either a one-off loan or an ongoing revolving credit facility to suit your business need.
The difference can be seen as a comparison between a single loan and a credit card. With a loan, you get a lump sum upfront that you then repay with interest; a credit facility provides you with a more flexible credit level, which you can dip into as you need to make payments to your suppliers, with interest calculated based on the current level of used credit.
Deciding whether you choose a one-off loan or a revolving line of credit will depend on several factors:
- Are you likely to need to use distributor finance again in the near future? - A credit facility is better if you are.
- Are you paying a single supplier or do you need capital for multiple suppliers? - A credit facility is needed for multiple suppliers.
- Do you want the security of instant access to more capital? - A credit facility provides that feeling of backup.
- Are you looking to limit costs and fees? - A single loan requires less administration and generates fewer ongoing fees.
- Are you willing to offset a small percentage of future profits for continued capital convenience? - A credit facility will dig into your profits in exchange for its flexibility.
- Are you confident that you can manage revolving credit without heavily leaning into it? - A single loan is far easier to control if you feel you’d be tempted to max out lines of credit.
The continuous nature of a structured line of credit combined with payment flexibility makes them a strong asset in any well-managed supply chain.
The Costs and Flexibility of Distributor Finance
Like all finance products, there is a cost associated with distributor finance that must be balanced against the benefits of the product.
One of the advantages of distributor finance is that it is leveraged against stock and other receivables to minimise lender risk. This means there is less pressure put on other aspects of lending, such as your business creditworthiness and affordability ratio.
However, it is important that you are in a good financial standing before obtaining distributor finance to ensure it is well managed and doesn’t create unwanted financial dependencies.
For distributors looking to secure significant volumes of stock from both domestic and international suppliers, distributor finance provides the financial backing you need.
Distributor Finance Repayment Flexibility
Another key advantage of distributor finance over traditional loan structures is the incredible flexibility offered through its tie to the stock as collateral.
Rather than a set monthly repayment schedule that places the same strain on monthly business cash flow irrespective of seasonal understanding or sales, specialist distributor funding is typically structured for repayments to be based on sales.
Thus, when stock is sold, repayments are made; when sales are low, repayments are similarly reduced.
ABC use £30,000 of their available £50,000 credit facility to purchase stock, planning to sell it at a 30% markup (for £39,000 total revenue).
- In the first month, sales are high and £10,000 of the stock is sold. ABC repay that £10,000, releasing amount of credit for future use and limiting the interest that will be accrued going forwards.
- In the second month, sales are still strong but drop. £6,000 of stock is sold. ABC repay that value to the credit facility.
- In the third month, sales drop further. £4,000 of stock is sold and repaid. ABC still have £10,000 of credit in use accruing interest.
- In the fourth, fifth, and sixth months, sales slow further, combining in a total of £8,000 of sales. ABC have made repayments as sales come in, but at the end of 180 days, £2,000 of stock remains unsold. Since the finance must be repaid in full, ABC must cover the final £2,000 plus any remaining interest using their available cash flow or profits.
- In total, ABC turned over £36,400 in sales. They repaid £30,000 plus a little over £1,000 interest and fees for the credit facility, resulting in approximately £5,400 in profit and with £2,000 of outstanding stock as assets.
- With credit being released during the six months, at any point, ABC could have used that credit to obtain new stock from any of the three suppliers. Those purchases would have begun their own identical 180 day flexible payment cycle.
Through regular repayments based on sales, distributor finance puts considerably less stress on cash flow and allows for easy management of repayments. Additionally, as repayments are made, the outstanding balance drops and the amount of interest charged is reduced.
Using Distributor Finance
Distributor finance is a limited form of finance that must only be used for the purchase of stock as described by pre-vetted suppliers. This means it cannot be directly used for any other business use.
Within that core limitation, however, distributor finance remains powerful in 6 key ways:
Revolving credit facilities can be set up to include multiple suppliers - All vendors must be pre-approved by the lender, who will undertake checks to ensure suppliers are reliable and to eliminate possible fraud, however, there is no limit for the number of suppliers that can meet this requirement. Many businesses use distributor finance to service several suppliers of differing sizes.
One-off loans with one supplier target can demand better rates - Limiting the risk further through distributor finance for a one-off purchase from a single supplier can result in extremely competitive rates.
Flexible repayment for loans - As with revolving credit facilities, one-off loans also enjoy a sales-linked repayment schedule that benefits ongoing cash flow.
Large amounts of credit available - As all distributor finance is leveraged against physical stock for collateral, credit limits are typically far greater than unsecured credit.
Funds paid directly to suppliers - The money never passes through your bank account, but is instead paid directly your suppliers. This offers greater security that lower risk, and also a faster administrative turnaround. Suppliers benefit greatly from improved payments and stable cash flow, which often results in better relationships between businesses.
Supply chain stability - Distributors are often a mid-point in a more complex supply chain. Distribution finance provides an additional layer of financial stability that strengthens the whole chain.
Cash Flow Jugging - Trying to Work Around Distribution Finance Limits
It is possible to divert funds from distributor finance to other divisions of the business through a method known as cash flow juggling. However, this must be avoided as it greatly increases risk and could lead to the loss of all distributor finance channels.
Lenders are well aware of this possibility and conditions are in place to prevent it, including the possibility for a stock audit to ensure all collateral is properly in place. Should an agreement be seen to be broken in this case, lenders are likely to close down any existing funding and demand immediate repayment. The long-term impact on your business credit history will also be significant.
It is important that distributor finance is only ever used for the agreed supplier purchases and not funds are not diverted in any way.
Distributor Finance with Clifton Private Finance
Obtaining specialist business finance needs expert skills and experience. Clifton Private Finance’s business finance team has the expertise you need to get the best distributor finance to suit your unique business needs.
To open your business up to growth and expansion through an increased ability to meet your customer's supply needs, speak to a Clifton Private Finance business finance advisor today.
