Product importers face an interesting financing challenge. On one side, they have foreign suppliers that demand prepayment by letter of credit before shipping (or even manufacturing the goods). On the other side, they have customers that demand 30 to 60 days to pay their invoices. Their cash flow is caught in the middle of these two challenging financial demands. Few have the necessary capital to operate their businesses this way for for many, the only solution that allows them to grow is to use business financing.

The challenge with using business financing is that it’s difficult to obtain – especially for small businesses. Most financial institutions are still retrenching and are not providing financing for small companies. And those that are providing business funding for small companies have very strict lending requirements and will only provide financing to companies with substantial assets and a long track record of success. These requirements rule out most small businesses.

There are two alternatives that have been gaining popularity as a way to finance import transactions. They are invoice factoring and purchase order financing. When used in combination the can handle both sides of the cash flow equation. Purchase order financing can handle your supplier prepayments while factoring can be used to accelerate your customer invoice payments.

The advantage of using these two solutions is that they are much easier to qualify for than conventional financing options. The most important requirement is that the transaction needs to be strong. The supplier needs to be a reputable company and your customer needs to have impeccable business credit. Aside from that, your business needs to be free of legal and tax problems.

One thing to note about purchase order financing is that it can only be used in transactions where your company purchases finished goods and resells them. Alternatively, many times it can also be used in transactions where you use a third party manufacturing facility. It cannot be used if your company is doing the actual manufacturing, assembly or product installation.