Growing your import business with PO Financing
Most import companies have very long payment cycles. The cycle starts when a client, often in the US or Canada, places a purchase order. In turn, the importer places and order with their supplier. The import company often has to pay up front, because suppliers demand payment before manufacturing and shipping the goods. And once the goods arrive, the corporate client often takes 30 to 60 days to pay the invoice. Because of this cycle, it can take an importer up to 120 days to recover their initial investment.
This creates a problem - especially for growing companies. Few have the financial resources to pay their suppliers, wait 120 days to recover their money and grow - all at the same time. But what do you do if you have growing orders - do you turn them away? Do you let your competitors take them?
A supplier financing alternative
One alternative that has been growing in popularity with importers is to use po funding. Basically, it's a tool that allows you to finance the supplier expenses associated with a specific purchase order. You can use these funds to pay your suppliers, which allows you to deliver the order. The transaction finishes once your end customer pays for the goods, in 4 to 8 weeks.
Funding purchase orders through this method has two distinct advantages over conventional financing. The first one is that the line is flexible - and can grow. The size of the line is determined by the creditworthiness of your purchase order, the reliability of your suppliers and your ability to deliver. The second one is that qualifying for this solution is easier than obtaining conventional business loan.
How does it work?
Due to the inherent risks of buying goods from foreign suppliers, most transactions use a letter of credit as a method of payment for your suppliers. Also, the letter of credit will have a clause that stipulates that goods must be inspected by a third party company (such as SGS) to ensure that they meet the quality and quantity requirements of the purchase order.
In general, transactions are structured as follows:
- You get a large purchase order from a credit worthy commercial client
- You place an order with your foreign supplier
- We issue the letter of credit (or payment instrument)
- After inspection, your supplier delivers the goods
- Your client receives the goods and pays for them
How much does it cost?
Purchase order financing rates are determined by the general risk and size of the transaction - which include the credit worthiness of your purchase order, the reliability of your supplier and your track record at fulfilling similar orders. In general, the line can cost 2% to 4% per 30 days, though this varies.
Cost reduction techniques
One common way to reduce the total transaction cost is to combine po financing with factoring. Once the goods have been delivered and accepted by your customer, you can factor the invoice and use those proceeds to close the purchase order line. Since factoring has a lower cost, using this technique often results in a lower total transaction cost.
Purchase order finance companies are used to working with small companies, and qualifying for this type of funding is easier than qualifying for conventional business financing. In general, companies break the qualification process into two parts. They review your transaction and your company separately.
Transaction must meet these criteria:
- Gross margins must be 20% or higher
- End buyer must have good commercial credit
- Order must be for finished goods
- Supplier must have good track record
- Order must not be for guaranteed sales (which is similar to consignment)
Companies must meet these criteria:
- Invoices must not be encumbered by liens
- Company must be properly organized and well run
- Company must hot have serious legal or tax problems
This solution has some limitations and is not for everyone. The order must be for finished goods and cannot involve any installation or customizations services. This means that this solution cannot be used by manufacturing companies. Also, this solution is not cheap, so it works best with transactions that have high gross margins and quick turnaround times.
Get a competitive po funding quote. USA and Canada.
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