A food and drink distributor turning over £6m a year on 45-day average terms has around £740,000 owed to it by shops, pubs and wholesalers at any moment. Its suppliers want paying in 30 days, and the stock was paid for weeks before it left the warehouse. Profitable on paper and permanently short of cash is the standard condition of a growing wholesaler.
Stock bought up front, sold on credit
Wholesalers buy in bulk, hold stock, and deliver to retailers, caterers, merchants or garages, almost always on credit. Each stage is paid for before the next produces income:
Purchase
UK suppliers typically give 30 days; overseas suppliers often want payment at shipment or by letter of credit, so cash goes out before goods arrive.
Hold
Stock sits in the warehouse for days (chilled food) or months (seasonal lines). Nothing is invoiced yet.
Sell on credit
Goods are delivered and invoiced on 30 to 60-day terms. Multiples and national chains often take 60 days or more.
Collect
The customer pays, less any deductions it is entitled to make. Only now has the cycle returned cash.
Thirty days of credit received against sixty given, with stock-holding time between, means a distributor funds two to three months of cost of sales itself, and growth adds proportionately to that.
Credit notes, returns and rebates: how they reduce fundable value
Distribution ledgers are rarely paid in full against the invoice. The difference between what is invoiced and what is finally collected is known as dilution, the most important number in underwriting a wholesaler.
Dilution: the proportion of invoiced sales never collected in cash for reasons other than bad debt: credit notes, returns, retrospective rebates, promotional allowances, shortage claims and settlement discounts.
- Returns and credit notes
Damaged goods, short deliveries, pricing errors and sale-or-return arrangements all generate credit notes after the invoice has been funded.
- Retrospective rebates and overriders
Supply agreements with multiples commonly include a volume rebate of 2% to 5%, which the retailer may deduct from remittances.
A provider analyses 12 months of sales and credit notes to measure dilution. A distributor at 2% to 3% might be offered an 80% to 85% advance; one at 8% to 10% might see 65% to 70% or certain customers excluded. Tightening returns policies or invoicing rebates separately directly increases available funding.
Concentration with major retailers
A listing with a national multiple is a milestone for a distributor and a headache for its funder, because one retailer can quickly become 40% to 60% of turnover. Providers in retail supply usually agree higher limits than the standard 25% to 30% for the large grocers and DIY chains, often on condition that bad debt protection is in place on that account. Raise at enquiry whether the retailer runs a self-billing or supplier-finance platform, which affects how invoices are assigned.
How factoring and invoice finance fit
Distributors with many small trade accounts tend to use invoice factoring, where the provider's credit control team chases hundreds of accounts; larger distributors with their own accounts team usually prefer confidential invoice discounting. Either way funding rises and falls with sales, which suits seasonal peaks.
| Business profile | Structure that typically fits | Why |
|---|---|---|
| Many small trade accounts, no credit controller | Invoice factoring | Collections service handles volume; disclosure is normal in the trade. |
| Established distributor, own accounts team, £1m+ turnover | Confidential invoice discounting | Lower fees, customers not told, business keeps the relationship. |
| Importer paying overseas suppliers at shipment | Trade finance plus invoice finance | Trade finance funds the purchase; the invoice facility repays it once goods are sold. |
| Heavy stockholding, £5m+ turnover, good stock systems | Asset-based lending | Adds a stock line to the receivables facility under one agreement. |
Stock, import finance and trade finance
Invoice finance does not fund the warehouse. Goods not yet invoiced to a customer are outside the facility, whether on the shelf or in a container at Felixstowe, so for most distributors the stock side is funded by supplier credit, with the invoice facility sized to pay suppliers within terms. Two additions are common. Trade or import finance pays an overseas supplier at shipment, often against a letter of credit; the invoice finance advance repays it once the goods are sold. Asset-based lending adds an inventory line at a conservative percentage of the stock's liquidation value, typically from around £5m turnover with reliable stock records. Suppliers' retention of title clauses matter too, since a claim over unpaid stock can conflict with the provider's security.
Eligibility for wholesalers and distributors
- Limited company or LLP; minimum turnover often from around £250,000 for factoring, £500,000 to £1m for discounting, several million for ABL.
- Business customers buying on credit, with delivery evidenced by signed notes, electronic POD or EDI confirmations.
- Goods sold outright; sale-or-return and consignment stock are usually excluded.
- No significant sales to consumers: cash-and-carry and online retail sales to the public are not fundable receivables.
The eligibility guide covers criteria common to all sectors.
Costs and limitations
Published market ranges put service fees for wholesale factoring at roughly 0.75% to 2% of turnover and discounting at about 0.3% to 1%, with discount charges of 1.5% to 4% over base rate or SONIA on funds drawn. On net margins of 2% to 5%, a facility costing 1.5% of turnover has to be justified by the sales it enables or the settlement discounts it unlocks: paying a supplier in 10 days for a 2% discount can more than cover the cost. The costs guide and calculator let you test figures for your own ledger.
Advantages
- Narrows the gap between 30-day supplier terms and 60-day customer terms.
- Can fund early-settlement discounts that exceed the cost of the facility.
- Scales with seasonal peaks; factoring's credit control suits ledgers with hundreds of accounts.
Disadvantages
- Stock is not funded without an ABL structure.
- Dilution reduces the advance rate and can trigger repayment demands.
- Retailer deductions complicate reconciliation.
- Consumer and cash sales fall outside the facility.
Worked example: a month's invoicing to retail and trade customers
Illustrative example Homeware distributor, 45-day average terms, 5% dilution reserve
- Gross invoices raised in the month
- £120,000.00
- Less dilution reserve (5%)
- £6,000.00
- Fundable value
- £114,000.00
- Initial advance (80% of fundable value)
- £91,200.00
- Service fee (1% of gross invoices)
- £1,200.00
- Discount charge (45 days at 3% over base, base assumed 4%)
- £787.00
- Credit notes actually issued during the month
- £4,500.00
- Cash collected from customers
- £115,500.00
- Balance released after collection
- £22,313.00
Figures are illustrative estimates only and do not represent a finance offer.
Charges of £1,987 are about 1.7% of gross invoicing. Had credit notes reached £9,000, the balance would have fallen to £17,813, and persistent dilution above the 5% reserve would entitle the provider to lower the advance rate.
Paying for stock in 30 days and waiting 60 to be paid?
Tell us about your customers, terms and credit-note history and we will explain which structures may be worth enquiring about.
Frequently asked questions
Can a wholesaler get funding against stock in the warehouse?
Not through factoring or discounting, which only advance against invoices for goods already delivered. Stock can be funded under an asset-based lending facility, where a lender adds an inventory line at a conservative percentage of liquidation value, usually for businesses with turnover of several million pounds and good stock records. Smaller distributors rely on supplier credit and trade finance for the purchase side.
How do credit notes and returns affect what I can borrow?
Every credit note reduces what the customer pays, so it reduces what the provider can recover. Providers measure your historic dilution, the share of invoiced sales lost to credit notes, returns, rebates and settlement discounts, and set the advance rate and a reserve to absorb it. A distributor at 2 per cent dilution might see an 85 per cent advance; one at 10 per cent might see 70 per cent or less.
Are invoices to the big supermarkets and retail chains fundable?
Generally yes, and their credit standing makes them attractive debtors. The complications are concentration, because one multiple may be half your turnover, and deductions, since retailers routinely take rebates, promotional contributions and shortage claims off remittances. Providers familiar with retail supply agree higher concentration limits and model the deductions into the advance rate.
Can invoice finance be used together with import or trade finance?
Yes, and for importers the two are often combined. A trade finance facility pays the overseas supplier, sometimes by letter of credit, when goods are shipped; once the goods are landed and sold, the invoice to the UK customer is assigned to the invoice finance facility and the advance repays the trade finance. Some providers offer both under one agreement.
My supplier gives me 30 days and my customers take 60. Does factoring close that gap?
It narrows it substantially. The supplier is still paid at day 30, and the customer invoice is raised on delivery, perhaps two or three weeks after you receive the goods. With an advance available within a day or two of invoicing, the cash arrives in time to pay the supplier and the balance follows when the customer pays. What factoring does not do is fund goods before they are sold.
Next steps
Gather an aged debtor report, 12 months of sales and credit-note totals, retailer supply agreements including rebate terms, and your top suppliers' terms. If a customer is already overdue, read what happens if a customer does not pay. Then request a quote or compare how other sectors are treated.