There can be significant financial challenges when a business tries to pivot from selling online retail to wholesale. Occasionally I’ll get a call from a company that has very unique or innovative products. The products have sold extremely well, direct-to-consumer, though their online store. Out of the blue, the company is approached by a big box retailer for a large wholesale order. The allure of a $100,000 order instead of a $100 order can be very enticing. 

Direct-to-consumer and retail sales:

The majority of small businesses today use an online platform to display and market their products, take orders, receive payments, and fulfill orders. They may have one or more suppliers that stock and drop-ship products directly to the customer for them. Some online retailers may use a third-party logistics provider (3PL) to provide these services if they have a private label brand or purchase in bulk to reduce costs. When the company uses a supplier that drop-ships directly to their customer very little working capital is needed. If they buy in bulk then they usually bootstrap or use integrated working capital lines provided by Shopify or PayPal. Sometimes the supplier or manufacturer will offer them NET terms allowing them to sell the products before payment is due for the goods. 

Wholesale sales:

The opportunity to transition from selling retail to wholesale is exhilarating. However, filling a purchase order from a big box retailer is a whole other animal. Most suppliers or manufacturers that drop-ship only keep enough inventory on hand to fulfill anticipated orders based on historical data. Production time for a large order can take from 30 to 60-days. Then you have the transit time. If manufactured in Asia you could be looking at another 30 or 40-days for delivery. Most manufacturers require a 30% to 50% deposit to start your order. The balance will be due when the order is ready to ship or when shipping documents have been generated. Most large retailers pay on NET-30 or NET-60 terms. You also need to remember that your profit margins are going to shrink when you go from retail to wholesale. Sometimes by as much as 50%. Understanding your funding gap, receivables days, and payables days are critical when it comes to selling wholesale. All this means you have become the bank. Tying up your cash for as long as 4-months, if you have the cash available to tie up. 

Financing options:

Friends and family. You can continue to bootstrap your way to success if you happen to have a wealthy friend or relative that believes in your business and can help you go form retail to wholesale. Not everyone has one or two of those. 

Bank loan. A traditional bank line of credit or term loan usually has a relatively low interest rate. However, they may require additional collateral to offset any perceived risks. Qualifications vary from bank to bank but you can generally assume the following. In business for at least 3-years. Cash flow positive. Little to no existing debt. And, have an excellent personal credit score. 

Merchant Cash Advance.  MCA loans are based on your last three business bank statements and your personal credit score. They will usually lend you up to 70% of the three-month’s average deposits. This may or may not be enough to cover the cost of goods (COGS) and shipping. The interest rate can be very high depending on your personal credit. I’ve seen interest amounts as high as 60%. They will debit your bank account daily, weekly, or monthly. Understand your company’s cash flow so you your account is not overdrawn. Be very careful with MCA loans and have a clearly defined exit strategy if you choose this type of business loan. 

HELOC. A home equity line of credit can provide working capital for your business if you have equity in your personal home. Some business owners do not like to use their personal home as a source of cash to grow their business but it can be very useful. HELOC’s usually have a variable rate pegged to the prime rate. This may not be the cheapest money, but if you’re confident in your customer’s ability to pay, you pay it off when you collect on your invoices. 

Purchase Order Financing. Purchase order financing (PO Financing) work well when you decide to make that move from selling online retail to wholesale. PO Financing is usually a form of asset-based lending. Although recently I have seen some MCA loan companies get into the purchase order financing game. For an asset-based lender, the future receivable is the asset they want to get to. Approval is usually based on your customer’s commercial credit history and the financial strength of the manufacturer. If the product is ready to ship they can cover the COGS and the shipping 100%. The goods must be drop-shipped to your customer for a secure supply chain. When the goods are delivered they then factor the invoice to pay off the PO financing. You will incur fees for both the PO financing and the factoring. If the manufacturer requires a deposit to start production you will most likely be required to pledge additional collateral. 

Plan ahead and structure your debt accordingly:

Way before you plan to transition from selling online retail to wholesale you need to think about your capital structure. Whether you use a bank loan or PO financing the lender will want to have a first lien position on your company’s assets. You can read more about liens and UCC filings on my other post, “What you need to know about UCC filings”. MCA lenders do not always care where they are in the debt stack. A HELOC will not usually file a lien on your company because they are lending against your home’s equity. You need to decide what type, and how much, debt to take on as your company grows. Always have a clear exit strategy. I recently spoke with a woman that had over $150,000 in loans from Shopify and PayPal, who had both filed a UCC-1, and needed $600,000 to fill an order from a large retailer. She had no assets to take out the $150,000 of existing loans and liens. She also would not agree to pledge her home’s equity. Unfortunately, I was not able to help her. Had she planned for this eventual opportunity, and structured her debt accordingly, she would have had more options when it came time to fill that million-dollar order.

Please reach out if you are planning to pivot from selling online retail to wholesale so we can structure your capital properly. You can fill out the form on the Homepage,  book some time on my calendar, or just give me a call at (843) 790-3661.