Import Export Financing Alternatives
The biggest financial limitation for most import and export companies is access to working capital. The cash flow and credit decisions associated with import and export transactions can be complicated - especially when the company is growing and booking larger orders.
If your company imports goods, you will have to deal with foreign suppliers that want to be pre-paid using a letter of credit. This can be a challenge for smaller companies because most banks and financial institutions - who guarantee the L/C - will only open one on your behalf if you can post collateral as security. Collateral can be in the form of cash, or by allowing them to debit a line of credit for the full amount of the LOC. POsting collateral can be a problem for companies that have received a very larger order.
If your company is exporting goods, or providing services internationally, you will have to deal with companies who demand payment terms. That means they will pay your invoices in four to eight weeks. This can place a strain on your cash flow, because you must be able to cover your expenses while waiting for payment. Additionally, offering credit to foreign companies increases the potential for slow payment or delinquencies.
A common strategy to solve this problem is to go to a bank to get small business financing. The problem with this strategy is that banks and lending institutions only finance companies that have ample collateral and a long track record. This leaves most entrepreneurs and small company owners without many options. For many companies in the import / export industry, using factoring and purchase order financing may be a better alternative.
Import Finance: Purchase Order Financing
If you buy goods from foreign suppliers, you may be able to get funding to open a letter of credit by using purchase order financing. This solution works if you already have a purchase order from a client, and you need funding to pay your suppliers. Requirements often include:
- Must have a PO from a credit worthy customer
- The PO must not be cancelable
- The gross margins must be greater than 20%
- Your supplier must have a good track record
One advantage of financing PO's is that the line is flexible and can adapt to growing orders, as long as they meet the funding criteria. This makes it an ideal solution for growing import companies.
Export Finance: Export invoice factoring
Waiting to get paid by a foreign customer can be a challenge and affect your cash flow. Many companies, especially smaller and growing businesses, don't have the financial resources to wait up to 8 weeks for an invoice payment. They need money sooner to cover business expenses, and to service new clients. You can bridge this cash flow gap by financing your export invoices. Export factoring provides immediate funding for invoices from credit worthy clients. This improves your cash flow, allowing you to grow your business. Additionally, most factoring companies will also help you examine the credit worthiness of your foreign clients - before you make the sale. This can help you decide which clients should get terms, and who should prepay or pay using a letter of credit.
Putting it all together - import and export financing
Companies that import goods and resell them can actually combine these two solutions for a complete import export financing package. You can use purchase order financing to handle the front end of the international transaction and then use factoring to handle the back end and payment. The advantage of combining these two products is that you can often realize lower transaction costs. This makes them an ideal trade financing solution for companies that have growing prospects but are limited by access to working capital.
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