There is a large market opportunity for US and Canadian companies that export timber, usually as logs, to Europe and Asia. Although timber is a commodity, some types of wood – especially high-demand specialty hardwoods – can command high profit margins. The combination of high demand and decent profit margins makes these transactions very appealing. However, many new companies face problems when trying to break into this market. Let’s look at what you need to execute a successful sale:
- A reputable buyer who is able to pay for the goods
- A supplier who can provide quality timber that meets your buyer’s specifications
- Logistics to move the goods to their final destination in a timely fashion
- Funding to pay the lumberyard and other suppliers
A number of transactions fail because small companies cannot secure funding (#4 above). They find solid buyers, reputable suppliers, and have figured out the logistics; but they lack the funds to fulfill orders. And without capital, the transaction falls through.
Transaction size: an obstacle for small companies
Most companies that purchase timber (or lumber), do so in bulk. They want volume and are only interested in purchasing full shiploads (i.e., 40,000 metric tons) of timber. They don’t want to deal with smaller orders. Furthermore, large buyers prefer to work with companies that can deliver full shiploads regularly. The demand for high volume puts small companies and new market entrants in a difficult position. Without capital, they can’t compete against larger, well-heeled competitors.
Remove the obstacle: finance the order
One way to overcome this issue is to find a way to finance the order. This is easier said than done. While the order may be profitable, few banking institutions are willing to provide a business loan to finance the order. They view the transaction as speculative, regardless of its potential. However, if your transaction is structured in a specific way, you could use purchase order (PO) financing to handle the transaction. PO financing provides funding to pay suppliers, which enables your company to fulfill large orders and grow.
Purchase order financing can only be used to fund timber transactions that meet the following characteristics:
- The foreign buyer must pay for the product with a letter of credit (L/C)
- The supplier must be able to fulfill the the purchase order in a single transaction
- The profit margin should be no less than 20%
Although we prefer to work with transactions that have a minimum gross margin of 20%, we can work with smaller profit margins. However, your company will be expected to contribute some funds to the transaction if gross margins fall below certain levels.
A word about building inventory
One of the reasons why many timber transactions can’t use PO financing is that the supplier cannot provide all the product that the buyer needs. Instead, you need to build up inventory by purchasing timber in small lots until you accumulate enough to fill the ship. This inventory buildup – taking weeks, or even months – is a common pitfall for these types of transactions. Unfortunately, we cannot finance a transaction in which you have to build up inventory over time. However, you can solve this problem by finding a supplier capable of handling large orders.
How does the transaction work?
The transaction itself is relatively simple. You purchase the timber from your supplier, and the purchase order finance company pays the supplier on your behalf. You ship the goods to the buyer, who pays you with a letter of credit. The transaction settles when you pay the finance company for the goods using an assignment of proceeds from the L/C. For more details about purchase order financing, visit our learning center or watch this video.
How much does it cost to finance a transaction?
The cost of financing a transaction is based on the specific risk profile, transaction amount, and delivery timing. Generally, the rate averages 3% per 30 days. However, this number can vary and should only be used as a guide.
Get more information
We are a leading purchase order finance company and can finance timber/lumber transaction. For more information, get an online quote or call (877) 300 3258.