PO Finance Article: Growing Your Import Business with Purchase Order Financing
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 company to grow successfully in this industry it must be well capitalized, or at least, have a reliable source of financing.
Let me give you an example. Let’s say that your company gets a very large purchase order (po) from a great customer. You, of course, would go to your supplier and try to fulfill the order. However, if your supplier is unwilling to provide you payment terms, you may need to post a letter of credit or similar instrument to guarantee payment. 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 sale opportunity. This is where purchase order financing can help you grow and succeed.
What is purchase order financing?
Purchase order funding is a business financing service that can help you fund orders that you cannot afford to fulfill. It empowers you to take significant orders from great clients and deliver them, without using any (or little) of your own funds. PO financing lets you grow your company using the proverbial “other people’s money”. It’s a great tool to take your business through the next stage of growth.
The basics of purchase order funding
A PO financing transaction is relatively simple. Once you have (or are near to having) a purchase order from your customer, you approach the PO funding company for financing. The financing company provides financing for the transaction, enabling you to buy the products from your supplier and resell them to the customer. Once the goods are received and verified, the PO funding company pays your supplier on your behalf.
Payment to your supplier can be provided in a variety of forms, although it is common to pay them with a letter of credit. Once the product have been received, you send an invoice to your client and wait for payment. The transaction between the PO funding company and your company is settled once your client pays the invoice. If the transaction is structured correctly and if your profit margins are good, this transaction can be done with 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 tricks
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. Accounts receivable factoring is usually cheaper than po financing, so this little trick can reduce the total cost of the transaction by a few percentage 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.
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