Product importers are accustomed to dealing with long, grueling cash flow cycles. On one hand, foreign suppliers often demand prepayment before manufacturing and shipping an order. This requirement is often non-negotiable. However, prepaying suppliers often ties your funds for 30 to 60 days, depending on their manufacturing schedules and shipping time frames.
On the other hand, if you sell products to commercial customers or big-box retailers, they often insist on paying invoices 30 to 60 days after receiving the product. The entire transaction will take 60 to 120 days before you recover your money and book profits. This cash cycle is long, and it’s difficult to grow a company under these conditions – unless you have substantial capital.
Solving the working capital problem
One way to solve this problem is to get a commercial line of credit to handle expenses. However, financial institutions regard your current cash flow as the source of repayment for their financing. Most banks are only comfortable financing well-established businesses with long track records and substantial collateral.
Few importers, especially small ones, can meet banks’ lending criteria. However, a business line of credit may not be the best solution for your company, particularly if you sell products to creditworthy commercial customers or government agencies.
Consider financing your purchase orders
For many importers, a better solution is purchase order funding. This program provides vendor financing to cover letter of credit expenses for companies with confirmed purchase orders for pre-sold goods. Purchase order funding enables you to accept and fulfill large purchase orders – even those that exceed your current capitalization.
An order must meet these criteria:
- It must be a confirmed, non-cancellable purchase order for finished goods.
- The buyer must be a creditworthy company or government agency.
- A foreign supplier must have good track record and accept letters of credit.
- It must have relatively high gross profit margins – at least 30%.
Simple transaction
Factoring companies who provide purchase order funding consider large orders from creditworthy customers as collateral that can be financed. In reality, they are financing the order and securing it against the invoice generated from its fulfillment. The finance company only covers your supplier expenses, and the transaction is structured as follows:
- You get a purchase order from your buyer.
- The finance company reviews the order and transaction details. If the order is acceptable, the finance company provides approval.
- The finance company issues a letter of credit to your supplier.
- The supplier manufactures goods and submits them for inspection.
- The goods are shipped to the buyer.
- The buyer pays the invoice 30 to 60 days later.
- The transaction settles.
For more details, please read “What is purchase order financing?”
Inspections
The purchase order finance company usually asks that the letter of credit, or payment method, have a provision that the goods be inspected and certified by an inspection company such as SGS inspections or Cotectna. This provision is critical for the success of the import transaction since it helps ensure that the products meet the quality and quantity requirements of your purchase order. More importantly, it minimizes the chances of having a dispute after the payment has been made.
Settling the transaction
There are two ways to settle the transaction. The most common way is to combine your purchase order line with a factoring facility because it often leads to a lower total transaction cost. In instances where that does not happen, the purchase order funding line can be used independently.
The line does not have a set limit
One of the most important differences between purchase order funding and other solutions is that the line has no limit, per se. Finance companies determine how much they are willing to fund based on the credit quality of your customer, the track record of your supplier, your gross margins, and your ability to fulfill the order. Consequently, if those parameters are met, a funding company may be willing to fund a very large order.
This aspect of purchase order funding makes it an ideal source of funding for import businesses that have great opportunities but not a lot of capital.
Get more information
We are a leading purchase order financing company and can provide you with a competitive quote. For more information, get an online quote or call us at (877) 300 3258.