Successful distribution companies are often marked by similar characteristics – experienced management, supply chain expertise, and strong inventory management to name a few. Because distributors typically operate on thinner margins than other industries, access to ample working capital financing can be a difference maker for these businesses. In working with scores of distribution companies over the years, we’ve identified multiple issues and challenges that face distributors when considering financing alternatives:
- Inventory Management: Inventory is often the primary asset held by distributors. Traditional banks may not fully understand or accurately value this inventory as collateral, leading to challenges in securing loans based on an advance rate on inventory assets.
- Seasonal Cash Flow Variability: Many distributors experience seasonal fluctuations in cash flow, where revenue peaks and troughs can occur due to seasonal demand or market trends. This variability can make it difficult to demonstrate consistent cash flow to traditional lenders, impacting their willingness to lend.
- Accounts Receivable Aging: Distributors frequently extend credit to customers, resulting in a larger accounts receivables balance. Traditional banks may view extended aging periods for accounts receivables as ineligible collateral, further limiting ongoing debt availability.
- Margins and Working Capital Needs: Distributors often operate on thinner profit margins than other industries, relying more heavily on efficient working capital management. This can make it challenging to cover operating expenses, manage elevated inventory levels, and invest in growth initiatives without adequate financing options tailored to specific cash flow needs.
- Complex Supply Chain Relationships: Distribution businesses are intricately tied to suppliers and customers in their supply chain. Miscommunications up and down the line can lead to supply shortages and inaccurate sales forecasts, creating financing challenges.
- Technology and Infrastructure Investments: As distribution evolves with technological advancements and the need for efficient logistics and inventory management systems, distributors often require financing to invest in technology upgrades and infrastructure improvements. Traditional lending sources may not always understand or support these specialized investment needs.
Addressing these challenges often requires working with lenders who specialize in financing distribution businesses or alternative financing sources that understand the unique needs and risks of the distribution industry. This specialized approach can provide distributors with the financial solutions and flexibility necessary to support their growth and operational goals effectively.
