A distributor buys stock, holds it and sells it on. Cash leaves the business when the goods arrive. It comes back only after the customer has received them, sold them, and processed an invoice that may not match what was ordered.
The inventory gap before the invoice gap
Wholesale carries two gaps rather than one. The first sits between paying a supplier and selling the goods on. The second sits between delivering to a customer and being paid. Factoring addresses the second, because it works on an invoice that already exists. The first is a separate problem, and it is usually met with inventory finance or a credit facility.
It is worth being clear about that distinction, because a distributor who expects factoring to fund stock will be disappointed. What it can do is stop the second gap from compounding the first.
Retail compliance and deductions
Large retail customers impose compliance rules on their suppliers. Shipments have to be labelled a certain way, delivered on a booked appointment, documented in a particular format. Break one of those rules and a chargeback follows, sometimes months later.
There are also negotiated deductions: promotional support, markdown allowances, listing fees. A deduction behaves like a partial credit note. It reduces what the customer pays, which reduces the value of the invoice a provider bought. That is why deduction history matters so much in this trade, and why clean shipping records are worth the effort.
How factoring is used
The distributor sells invoices after delivery, once the customer has received the goods and the delivery receipt has been signed. Under a notification arrangement the customer pays the provider directly, which also removes the awkward conversation about an overdue account.
Seasonal distributors often use a selective arrangement around peak periods, when stock has been bought and invoices have not yet been paid. Others run a whole-ledger arrangement all year.
Sector cautions
- Deductions and chargebacks that reduce the collected amount.
- Concentration among a small number of retail chains or buying groups.
- Seasonality, where revenue arrives in a narrow window.
- Goods returned after delivery, which can reverse part of an invoice.
- Minimum order values, which can make small accounts uneconomic to factor.
Questions to ask a provider
- How do you treat a customer deduction raised after purchase?
- Do you require the delivery receipt with the invoice?
- Will you buy invoices from my largest retail customer, and to what limit?
- Can the arrangement run seasonally rather than all year?
- Is the arrangement recourse or non-recourse?
Buying groups and shared ordering
Some independent retailers and contractors buy through a buying group or a shared ordering system. The invoice may be issued to the group rather than to the individual member, which changes who owes the money. Before selling an invoice, confirm which entity is legally obliged to pay it. A provider will ask the same question, and the answer decides whether the receivable can be bought at all.
Related guides
Read spot factoring for seasonal use and full turnover factoring for a year-round structure. City context sits in the Toronto and Montreal guides. The process is explained in how invoice factoring works.