How to Take your Import Business to the Next Level with Purchase
Order Funding
Most importers have seen their businesses grow dramatically in
the past years. The drop in the cost of overseas manufacturing
coupled with the insatiable appetite of US consumers for more
and cheaper goods has created a bonanza for the industry. Both
large and small importers have seen the size of their orders -
and revenues - grow dramatically. However, for any business to
grow successfully in this industry it must be well capitalized,
or have a source of financing.
Let me give you an example. Let's say that your company gets a
very large purchase order (PO) from your best customer. You,
of course, would go to your supplier and try to fulfill the
order. However, if your supplier is unwilling to extend you
terms, you may need to post a letter of credit or similar
instrument. This is where small and mid size importing/exporting
companies run into problems. If they cannot post a letter of
credit, they will not be able to fulfill the order and will lose
the business. This is also where purchase order financing can
help you.
What is purchase order financing?
Purchase order financing is a tool that can help you
finance orders that you cannot afford to fulfill. It allows you
to take large orders from great clients and deliver them,
without using any (or little) of your own funds. PO financing lets you grow your business using other
people's money. It's a great tool to take your business to the
next level.
The basics of purchase order funding
A PO financing transaction is fairly simple. Once you have
or are close to having a purchase order from your customer, you
approach the PO financing company. The PO financing company then provides financing for the
transaction, enabling you to purchase the goods from your
supplier and deliver them to the customer. Once the goods are
received and verified, the PO financing pays your supplier on
your behalf. Payment to your supplier can be provided in a
variety of forms, although it is commonly done using a letter of
credit. Once the goods have been received, you send an invoice
to your client and wait for payment. Once your client pays the
invoice, the transaction between the PO funding company and your
company is settled. If that transaction was structured properly
and if your margins were good, this transaction should have
required little if any out of pocket expenses from your company.
This is why PO financing is so powerful.
The cost of PO financing
The cost of PO financing will be based on a number of criteria,
including your experience in the industry, the complexity of the
transaction and the credit worthiness of the end customer. A
rule of thumb for the industry is that a transaction must have
profit margins of at least 20%, or better, to be affordable.
That will allow you sufficient funds to cover the cost of PO
funding and still realize significant profits.
Cost reduction options
The main cost driver in purchase order financing is risk. The risk in the
transaction is reduced dramatically substantially once the
product is delivered and an invoice is generated. A common trick
to reduce the cost of the transaction is to factor the invoice, and use
the factoring proceeds to close the purchase order financing
part of the transaction. Since accounts receivable factoring is cheaper than PO
financing, this little trick can reduce the total cost of the
transaction by a few points. To capitalize on this cost
reduction trick, you should be sure to work with a factoring company that also
does purchase order financing. That will enable you to close the
purchase order funding component seamlessly.
About Invoice Factoring Group
Invoice Factoring Group can provide you with a free purchase order funding , purchase order financing or accounts receivable factoring quote. Marco Terry,
the president, can be reached at (866) 730 1922.