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Article: Growing Your Import Business with Purchase Order Funding

Importers have seen their businesses grow dramatically in recent years, as the combination of a drop in the cost of overseas manufacturing and an increase in demand for cheap goods in the US has created a bonanza for companies in the industry. Companies that are importing quality products that meet consumer demand have seen the size of their orders – and the magnitude of their revenues – grow significantly.

At the same time, many smaller companies have missed out on these opportunities. While they may have access to the right products and suppliers, smaller companies do not have access to capital. Without capital, they can’t pay foreign supplier expenses, they can’t wait for local clients to pay, and they can’t execute on large purchase orders.

The challenge with large purchase orders

For example, assume you get a sizable purchase order (PO) from one of your best customers. Obviously, you would ask your supplier to fulfill the order. But if your supplier is unwilling to offer payment terms (e.g., net-30 terms), you may need to prepay for the goods directly or through a letter of credit. At this point, small importing/exporting companies experience financial difficulties. If they cannot post the collateral for a letter of credit, they cannot fulfill the order and lose the sale opportunity.

How to finance large orders

You can solve this problem using purchase order funding – a vendor financing solution that can help you fund orders that you cannot afford to fulfill by yourself. This solution enables you to take – and deliver – large orders from creditworthy clients, using little (or none) of your own funds.

How does purchase order funding help you?

Purchase order funding helps you by providing financing to cover your foreign supplier expenses for confirmed purchase orders from creditworthy commercial – or government – clients.

The finance company reviews the purchase order from your client and evaluates the PO’s strength and risk. Based on that review, the finance company can provide you with a letter of credit that enables you to pay your foreign supplier. Once paid, your foreign supplier can ship the goods to your client and fulfill the order. The financing transaction concludes once your client pays for the goods.

The strength and risk of your PO is determined by three criteria:

  • The credit profile of your client, who pays the purchase order
  • The track record of your supplier, who manufactures the goods
  • Your experience with these types of transactions

Cost

Purchase order financing rates are based on a few variables, including your track record in the industry, the complexity of the transaction, and the creditworthiness of the purchaser.

If you need more information, please submit an online quote or call (877) 300 3258.

Cost-reduction strategies

The main cost driver for this type of financing solution is risk, especially prior to product delivery. Obviously, this risk decreases substantially once the product is delivered and an invoice is created. A common strategy to reduce transaction costs is to finance the invoice once the product is delivered and then use the factoring proceeds to close the PO funding transaction. Invoice factoring is usually cheaper than PO funding, so this strategy can reduce the total transaction cost. To employ this approach, and to avoid having to deal with multiple finance companies, be sure to work with a factoring company that offers both solutions.

Return to the Purchase Order Financing Resource Center.