Distributor finance
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A finance provider funds a distributor's stock of a manufacturer's goods until the distributor's own customers pay.
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01 · In plain words
A finance provider pays for the distributor's stock, and the distributor repays once its customers pay
helps a distributor that buys goods from a large manufacturer and sells them on. The distributor has to hold the goods and wait for its own customers to pay. A finance provider funds that wait. Money from the distributor's sales to shops and end customers then pays the provider back (Global Supply Chain Finance Forum).
It goes by other names: buyer finance, dealer finance, and . The forum notes that floor plan finance is "not always strictly comparable" (GSCFF). It is one of the techniques that the forum groups as loans, next to loans against stock and loans against invoices (GSCFF, Techniques).
The finance provider takes security. The forum names it as an assignment of rights over the stock and over the money customers owe the distributor. This gives the provider rights over the goods and the money owed, which protect it if the distributor does not repay (GSCFF). The manufacturer can add its own support, such as a promise to buy goods back.
Who is involved
- The manufacturer is the seller. The forum calls this large manufacturer the party. The program is built around it.
- The distributor is the manufacturer's buyer. It holds the goods and sells them on.
- The finance provider, a bank or another lender, signs the financing agreement directly with the distributor and funds the stock.
- Shops and end customers buy from the distributor. Their payments repay the finance provider.
02 · How it works
Eight steps take the goods from the manufacturer's program to the distributor's customers paying
Figure 1 · Interactive
Distributor finance, step by step
Read down the steps. The last step is where the facility comes up for review.
Source: Global Supply Chain Finance Forum, Standard Definitions, Distributor Finance, 2016.
03 · What it means for you
The distributor gets its stock funded until customers pay, and the manufacturer may back the program with its own promises
Figure 2 · Interactive
What distributor finance means for each side
Choose your side of the trade.
04 · Worked example
Holding $1 million of goods for 90 extra days costs $15,000 at an illustrative 6.00% a year
This example uses round, made-up numbers. A distributor holds $1,000,000 of goods while it waits for its customers to pay. The cards show the cost of waiting 60 or 90 more days. The finance rate is 6.00% a year, kept fixed here to keep the sums simple. This example counts a year as 360 days, the standard convention in US money markets. The cost is the goods value times the rate times the days, divided by 360. Real rates depend on the distributor, the provider and the deal.
Figure 3 · Illustrative
Cost of funding $1,000,000 of stock at 6.00% a year
Illustrative inputs. The 90-day cost is highlighted.
Made-up rates, worked out by our checking script (inventory-holding-cost.py). Your costs will differ by distributor, provider and deal.
05 · When to use it
Distributor finance suits a manufacturer that sells through distributors and is ready to back them
Good fit when
- A large manufacturer sells through distributors that need to hold goods for resale until their customers pay (GSCFF).
- The manufacturer is willing to take part, for example with a stop-supply letter or a buy-back guarantee (GSCFF).
- The goods are separate units the finance provider can count and check, as in floor plan lending (FDIC).
Another tool may suit better when
- The manufacturer will give no support and the lender will not fund the distributor on its own credit alone. Look at inventory finance or an asset-based revolving facility, which other cards in this guide explain.
- The goods are hard to count unit by unit, so regular stock checks would be hard to run. Look at warehouse finance, where goods sit in a warehouse under receipts.
- The distributor wants cash on the invoices it has already sent to customers. Look at factoring or invoice discounting.
06 · Rules and a real case
Signed agreements govern distributor finance, and a large lender's filing shows a dealer program at work
Each program runs on its own documents: the facility letter, the security documents and any letters from the manufacturer, under the law the parties choose (GSCFF). The market uses the Standard Definitions for Techniques of Supply Chain Finance, published in 2016. When the supply contract uses , those ICC terms set where delivery and risk pass from the manufacturer to the distributor (ICC). Security over stock and invoices follows local law. In the United States that is the Uniform Commercial Code (Uniform Law Commission).
A real case. In its annual report (Form 10-K) for 2023, filed with the US SEC on February 7, 2024, Ford Motor Credit Company LLC (Ford Credit) says it offers "a wholesale financing program for qualifying dealers." The program funds new and used vehicles that dealers hold in stock, also known as floorplan financing. Ford Credit says: "Dealers generally pay a floating interest rate on wholesale loans" (Ford Motor Credit, Form 10-K 2023). US bank examiners describe the same kind of lending. They expect stock inspections, generally monthly, and a periodic curtailment program for unsold units (FDIC, Floor Plan Loans).
Summary
Distributor finance funds a distributor's stock until its customers pay, backed by the goods and, where it agrees, the manufacturer
The finance provider pays for the distributor's stock. The distributor repays from its sales. The provider holds rights over the stock and the customers' invoices, and the manufacturer can add a stop-supply letter, a buy-back guarantee or other support. For the distributor, the key is to sell the stock on time and keep up with any stock checks and repayments on unsold units that the agreement requires.
Related guides: Distributor finance; Inventory finance; Trade finance vs supply chain finance; The cash conversion cycle. Related cards: Inventory finance; Payables finance; Asset-based revolving facility. Every term is in the Trade Finance Glossary.
Sources
- Global Supply Chain Finance Forum, Standard Definitions for Techniques of Supply Chain Finance: Distributor Finance, 2016. Supports: definition, other names, the parties, the flow, security, manufacturer support, short term use and annual review, key risk
- Global Supply Chain Finance Forum, Techniques index, 2016. Supports: distributor finance grouped with loans
- Global Supply Chain Finance Forum, Standard Definitions for Techniques of Supply Chain Finance, 2016. Supports: the market definitions
- Federal Deposit Insurance Corporation, Core Analysis: Floor Plan Loans, Examination Modules, October 2022. Supports: monthly inspections, curtailment, manufacturer repurchase agreement
- Ford Motor Credit Company LLC, via SEC EDGAR, Form 10-K for fiscal year 2023, February 7, 2024. Supports: the real case: dealer wholesale financing program, floating rate
- International Chamber of Commerce, Incoterms 2020, in force January 1, 2020. Supports: delivery and risk transfer in the supply contract
- Uniform Law Commission and American Law Institute, Uniform Commercial Code, 2022 Amendments, 2022. Supports: US secured transactions law
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