Wholesale distribution has been around for many many decades, and for good reasons. The simplicity of buying low and selling high is the essence of a wholesale business, and with this simple concept you are on the path to healthy profits.
Now you might have heard starting a wholesale distribution business is capital intensive and risky. What if you buy a ton of inventory and no one buys it? Or that the internet has killed this business because retailers can buy directly from manufacturers. First off, the internet has not killed this business model. Some will argue it has made the process easier than ever before. And what if I told you that you could start a wholesale business with a small amount of capital and low risk. In this article I will be covering just how to do that as well as:
– Proper documents / licenses needed
– Niche
– Finding a supplier
– Target market
– How to keep risk and capital low
– How to be a better option than the retailer going straight to the supplier
Some of these steps and tactics will vary depending on the specific niche you decide to go after. Now lets get into the details.
Documents and licenses
DBA
For the purpose of starting off with the least amount of capital as possible we are going to go with solely a DBA (doing business as) vs. an LLC. It is important to know that a DBA is not a legal entity. The sole purpose of a DBA is to do business under a name other than its legal name (your personal name(s)). If capital is not an issue I suggest going with an LLC, as this will provide extra legal protection and tax benefits for your business. The cost to file a DBA varies based on the city or county clerk where the business operates. A business that files a DBA may expect to pay anywhere from $10 to $100.
There are several reason using a DBA is important, one being credibility. If you were not to use a DBA your business would be operating under your personal name. As you can imagine, a customer cutting a check to your personal name doesn’t exactly scream professional. And being professional is going to play a critical role in becoming a successful wholesale distributor.
Another reason a DBA is not only important but necessary is going to do with your business bank account. Separating your personal finances from your business finances is a must in any business. Whether its owning rental properties or operating a wholesale business, keeping these finances separate is good business practice and flat out makes life easier. In order to accomplish this your bank will require you to obtain a DBA before setting up a business bank account.
Resell license
Not only on a wholesale distribution basis but for any business that plans on buying products in bulk with the intention to resell to customers must obtain a resell license. Depending on the location where you reside a resell license might alternately be called a resale license, resale certificate, sales tax ID/permit, Use and Sales Tax License, wholesale license or another term.
The purpose of a resell license is to allow your business to avoid paying sales tax on the products you purchase to resell. In turn, the end customer will be the one paying the sales tax when they purchase the product from the retailer. This of course is a benefit to you and your business. For the purpose of this article we are assuming that this business will be ran out of your home with no warehousing in any other state. This means you will only need a resell license for the state you are operating out of.
EIN
Before applying for your resell license we have found it to be best to apply for an EIN (employer identification number). Now technically you can use your personal social security number but back to good business practices we recommend and EIN. This is a fairly simple process that can be done for free. To accomplish this visit the irs.gov site, locate the search bar and type in EIN. Once the results populate find the link that says apply for EIN online and follow the steps. There are a few different ways you are able to apply for an EIN but online seems to be the best option considering you will receive your EIN immediately.
Once you have completed the application for an EIN and have received your number you can now apply for your resell license. In most states a resell license is free of charge.
To apply for a resell license you will need to visit your states department of revenue website. Being that this is done on a state by state level there are different steps to the process for every state. This also means different states might require different forms and documents. MY best advice is to follow the prompts per your states website.
Once you have secured all of the proper Documents and licenses lets move onto finding a supplier and product.
Niche
Your product
When it comes to products it is really all up to you and what niche you decide to go after. That’s right we recommend going after a specific niche. You might think well if I put together a catalog or product list of tons of different products I will appeal to everyone. Unfortunately that couldn’t be farther from the truth. This method would hinder quality control since you most likely would not be ordering samples of a hundred different products. This also would be steering away from the low capital low risk method. When starting out it is usually best to stick with 2-3 products at most.
In this example lets say we have decided to wholesale slippers to hotels and nursing homes.
Finding and working with suppliers
Alibaba
After you have landed on a niche and a couple of products in this case slippers, it is time to find a supplier. For this step we will be using Alibaba.com. Alibaba is a giant market place of Chinese suppliers and manufacturers. Think of it as an Amazon of manufacturers rather than a specific product.
Once you have reached the Alibaba home page you will see a search bar. In the search bar you would type in slippers or hotel slippers and make sure the search filter is set for products not suppliers. Below thousands of products will populate along with their pricing, order amounts, description and other information.
MOQ
Once you land on a product you will notice there is a (MOQ) minimum order quantity. This is the minimum amount of product you must order from the supplier. For example say you find a pair of slippers that appear to be what you are looking for and they are only a $1. The MOQ on this product is 500 pairs, your order will total $500 before shipping. You might be thinking I haven’t talked to any potential buyers or even tested the market yet, $500 is alittle much. Well good news there is a way around this.
Before ordering this product you will want to message the supplier and ask to view a product catalog. Most suppliers will have dozens or products not just this one. Due this with three or four suppliers, view all of their products and nail it down to your top three choices. You now can message the suppliers and request a sample pack to determine the quality of the product.
Deal with credible suppliers
When it comes to purchasing your products Alibaba has made quite a few changes over the years in terms of weeding out non credible suppliers. Although this is the case we still recommend working with suppliers that are verified or offer trade assurance. It is also a good idea to stick with paypal for a payment method to stay secured as possible.
So your samples arrive, you look them over and decide which ones you will be going with. Now it is time for the fun part.
Selling your product
Target market
Using the example of slippers we are going to be going after Hotels and nursing homes as we mentioned before. Depending on your niche think of who would benefit most from your product. If your product is dog / cat beds you would target pet shops, groomers even veterinary clinics. Point is keep it relevant.
Ordering less than the MOQ
After visiting a few potential customers and letting them check out your sample one decides to give you a try. Most likely your first order wont meet the MOQ your supplier requires but that’s ok. After doing this for awhile you will find out that basically everything is negotiable. If this is the case simply explain to the supplier that you have a group of clients that would like to send a couple samples out to each of their branches before placing an order.
No inventory no problem
Time to explain the order fulfillment timeline to your customer since we have no inventory on hand. If you are working with a good supplier they will be able to provide you with an accurate shipping timeline. A lot of times they will be able to get your order from their warehouse to your house within two weeks. If you explain to your customers that their first order takes a little longer they will be ok with it as long as you let them know.
To build trust with your customer let them know payment isn’t due until they receive the product. However if you build good rapport and control the sale there are times you will be able to get paid upfront. Making a sale and creating interest before purchasing the order is how you will keep capital and risk low.
Why your business is a better option
Lets rewind really quick to pitching your product to your potential customer. If they happen to bring up – “why would I purchase from you vs. a supplier online”? This is where you will need to paint the picture of why it is better to go to you. Explain that you have already done all of the leg work as in found a reliable supplier and a quality product. That it is much easier dealing with someone in the country vs. out of the country. Or even better right down the road! Once you acquire more business and start stocking an inventory you can also offer no to low MOQs to stay ahead of the competition.
Once your order arrives deliver to your client for free. When just starting to build a business these are the little things that will help you appeal to potential customers. Make customer service your top priority, continue to try to get that next sale and repeat these steps and you will build a profitable wholesale business.
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