Stock for a seasonal peak: a worked example

A retailer came to us in August with a $60,000 order, a supplier who wanted payment before shipping, and a fourteen-week window to sell it. This is the arithmetic we ran, in the order we ran it. The numbers are the client’s; the reasoning is the part worth borrowing.

The situation

Turnover around $92,000 a month, six years trading, one seasonal quarter that produces roughly a third of the year’s revenue. The order was for that quarter. Miss the shipping window and the stock lands after the peak it was bought for, which is the worst of both outcomes — the cost without the season.

Step one: size the order, not the appetite

The first question is never how much can we lend. It is how much stock the business can actually sell inside the window. At a gross margin of 45 per cent, a $60,000 order returns about $109,000 at full sell-through — but full sell-through is a forecast, and forecasts in retail are optimistic by construction.

So we worked the number at 75 per cent sell-through inside fourteen weeks: roughly $82,000 in revenue from the order, with the balance either discounted later or carried. If the facility only works at 100 per cent sell-through, it does not work.

Step two: work out what the business can service

This is the step that decides the facility, and it does not need a rate to run. Servicing asks what share of revenue a repayment can take before the business starts robbing something else — wages, rent, its own tax obligations.

Against $92,000 a month of ordinary trading, plus the additional revenue the stock itself generates, we worked to a weekly repayment the business could meet in a soft week rather than an average one. That ceiling is the constraint. Everything else — the advance, the term, the schedule — has to fit underneath it.

Step three: check the runway against the term

Fourteen weeks of selling against a term of three to six months is the right shape: the stock generates cash before the last repayment falls due, rather than after it. That is the test. If the repayment schedule finishes before the stock converts, the facility is being repaid out of the business’s other revenue, and it has quietly become a loan against the whole business rather than against the order.

The number we have deliberately not put here

You will notice there is no factor rate in this worked example. That is on purpose. Pricing depends on the file, and publishing an illustrative rate would give you a number that looks like an offer and is not one — the figures above are an estimate of one client’s position, not an offer of finance to anyone.

What you can do without our rate is the part that matters: work out your own servicing ceiling first, then ask any lender for the total repayable in dollars and the weekly amount. If the weekly amount is above your ceiling, the answer is no regardless of how attractive the rate looks.

What the arithmetic protects you from

Ordering to the limit of what a lender will advance rather than to the limit of what the season will absorb. That is the failure mode in seasonal stock finance, and it is not usually caused by the cost of the money. It is caused by buying more than fourteen weeks can sell.

If you have an order in front of you and want to run this properly, check your eligibility or talk to the credit desk. The guide at the complete guide to short-term business finance covers the product mechanics in more depth.