Wholesale transactions occur when you sell quantities of your work to a dealer or a retailer, usually at a discount. In other words, you charge your costs plus a markup that generates a profit (although usually not as large a markup as when you sell the item directly to consumers). That dealer or reseller resells your work to the general public.
Don’t expect to get a check as soon as the wholesale deal is made. Payments for wholesale sales are traditionally made 30, 60 or 90 days after the goods have been transferred. In effect, your crafts business is extending credit to the retail outlet. You may not feel like you’re extending credit—after all, you’re just waiting for payment—but from a legal perspective, you’re making an unsecured loan to the store or gallery. Your “creditor” status can have a significant impact on your business, particularly if you extend a lot of credit to a store that has financial problems.
The Wholesale Invoice
When selling wholesale, you don’t need a custom-made wholesale order form. Perfectly suitable order forms can be purchased at an office supply store or downloaded from the Internet. You can personalize these forms with the name of your business. Alternatively, many business software accounting sites include customizable forms and invoices. At a minimum, your order form should include:
- information about your company (name, address, phone and so on).
- date of the order
- information about the buyer, including customer account number, “ship to” address, sales tax number and “bill to” person
- purchase order number
- ship date and method of shipping, and
- order information including quantity, item number, description, price each and total cost.
It’s normal to include a statement in the invoice that the order cannot be canceled. After all, a deal is a deal, and most stores understand that. If you want, you can seek compensation in the event of cancellation. For example, in the sample invoice, check the box, “Buyer agrees that in the event the order is cancelled, there is a cancellation fee of __% of balance due.” Although some crafts businesses use such language, always keep in mind that if a store fails to pay it, you must go to court to enforce the agreement. The same is true for the optional statements regarding interest payments and collection fees. When preparing your own invoices, you can decide whether to use this language (or delete it) in your invoice.
Can You Trust the Retailer?
When People’s Pottery, the 47-store chain specializing in American-made crafts, filed for bankruptcy in December 2001, it claimed $20 million in debts. That sum included $3 million that remained owing to approximately 250-300 crafts vendors. An attorney working on the case told one of the crafts artists that it would be a victory if the crafts businesses got 1% of the amount owed them.
What happened to the $8 to $10 million in assets that the company still had when it declared bankruptcy? It was used to pay secured creditors—lenders who had demanded that their loans be secured with property. If the debt wasn’t paid, the secured creditors could demand that the bankruptcy court sell the assets and turn the proceeds over to the creditors. Crafts artists who had used Net 30 or Net 60 terms were considered unsecured creditors and would only be paid if money remained after paying the secured creditors. In other words, the crafts artists were left holding an empty bag!
It would be difficult, perhaps impossible, for a small crafts vendor to avoid the disastrous results of the People’s Pottery debacle. Unless a crafts business has somehow secured its loan by requiring in writing some collateral as a condition of a wholesale purchase, the purchaser’s bankruptcy will effectively wipe away the debt. Because there’s not much you can do once a store goes into bankruptcy, you’ll need to minimize your risks beforehand. Below are some suggestions:
- Avoid putting all your eggs in one basket. In the case of People’s Pottery, crafts artists who had a range of retail accounts suffered less than those who had relied exclusively on People’s Pottery. On the same note, don’t ditch your smaller retailers because of large orders from one retailer. Loyal smaller accounts give a business a constant, reliable source of income.
- Don’t wait to pursue those who owe you money. Some vendors managed to successfully pursue People’s Pottery before it went under. .
- When in doubt, don’t extend credit. Some larger retailers will promise you anything to get your merchandise into the store under a Net 30 or 60 arrangement. That’s because the store may have an “asset-based” loan with its bank. Under this arrangement, the more merchandise in the store, the more money the store can borrow. Don’t play into a failing store’s problems. There’s no sense extending credit when you have doubts. In these cases, obtain prepayment or payment upon receipt of the goods.