How International Purchase Order Financing Works

If you are into the wholesale distribution business, then explaining your work to a “layman” should easy enough. You act as a middleman between the manufacturers of goods and the retailers selling these goods in their various shops. The retailers ask for certain goods in the amount they want, and your job is to meet these orders and arrange for everything on schedule. But sometimes, you may need international purchase order financing to make it all work.

International Purchase Order Financing

The Potential Problems with International Distribution

When everything lines up properly with this arrangement, everything goes smoothly. You fill an order, arrange for the goods from overseas suppliers, and everyone’s happy. The problem, however, is if the retailers ask for an order that’s too large for you to cover. You may not have enough working capital with you to buy the supplies you need.

This usually has two possible endings: either you take the order and fail, or you have to turn down the order. Either way, you end up with a retailer who’s not too happy with your performance, and you lose not just the profits from that order but the profits from all their future orders. The retailer, after all, would stick with a wholesaler who can provide what they ask for on a regular basis.

And sometimes there can also be problems paying foreign suppliers. It’s not just the problem with foreign currency, but there are also some potential problems with foreign laws and regulations. These foreign rules can be very complex, and you can end up unknowingly violating some clause or rule.

Solving Problems with Purchase Order Funding

But just because you don’t have enough money to pay for supplies doesn’t mean that you automatically have to refuse a large order. In fact, the purchase order is exactly what you need in order to get the financing you need. This is called purchase order financing.

With this option, the funder regards the purchase order as a form of collateral. The finance company evaluates the capacity of the retailer to make good on the payments, and it also takes into account the kind of profit you’ll make on the deal. Depending on the details of the purchase order, the finance company can then forward a percentage of the value of the order (such as 50%) to you so that you can then use that advance to pay off your suppliers.

Actually, you don’t get the money. Your finance company pays off the supplier with a letter of credit once they’ve made their deliveries, and then the retailer pays the finance company. The finance company then forwards you the rest of your money once the retailer has made payment minus the fees it charges.

Additional Services

Of course, the retailer won’t pay in cash right away. Usually, you get an invoice and the retailer will pay you in 30 days. With some retailers, the waiting period can be as long as 90 days. The finance company can then advance the money for the invoice so that you can get your cash immediately. This service is usually part of the service that comes with international purchase order financing.

 

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Is AR Financing Considered as Debt?

Nowadays, suppliers are always demanding for immediate payment. On the other hand, your clients are only looking to make payments after 30 – 90 days. If your business is facing issues with cash flow because of the aforementioned situation, you may want to check out accounts receivable financing. Is AR financing considered as debt? Well, it may or may not be, depending on the situation.

In general terms, factoring or AR financing is the process of converting your accounts receivable into cash through a third party company known as the factor. The factor may pay as much as 90 percent of the invoice value, and then proceeds in collecting payments from your customers for a fee. The remaining balance will be paid to you once the customers render full payment.

In this business, you may avail either the recourse or the non-recourse factoring. Knowing the differences between the two options is important because choosing one or the other may lead to the prosperity or the bankruptcy of your business.

Recourse Factoring

If you avail of a recourse factoring agreement, you are basically using your accounts receivable as collateral. Although factors are in the business of buying your invoices, they also reduce their risk by having a recourse option. In a nutshell, if your client fails to pay after the agreed amount of time, you will be the one shouldering the bills.

When this occurs, your accounts receivable may be considered as debt by your factor. Therefore, be very careful in entering a factoring agreement because according to the International Factoring Association, 79 percent of factors offer recourse factoring. You do not want your profits to turn into debt just because you did not read the fine print carefully.

To lure businesses to acquire their services, factoring companies offer credit checks to all your current and prospective customers so that you will only extend credit to clients who have excellent credit ratings. Furthermore, recourse factoring is the cheaper option between the two options since factors assume lesser risks.

Non–Recourse Factoring

If you opted for a non-recourse factoring, you are selling your accounts receivable to the factor. In this course, your business is freed from any form of debt because the factoring company completely assumes the risks.

Of course, factoring companies need to make up for carrying the risk so therefore, the discount rate will be greater. In other words, payment for your invoices will be significantly lesser compared to the recourse option.

Choosing this type of factoring option is recommended if your business relies on a few huge corporations. Although you may lose a significant amount of money if you convert your accounts receivable to cash through this route, you are protecting your business from bankruptcy. Should recession hit and one of your biggest customers becomes insolvent, you can be sure that your company will not pay the price.

Summary

With clients taking a considerable amount of time before making full payment, factoring is a legitimate option to address cash flow issues. Recourse factoring will pay you more for your invoices but if your customers fail to forward payment, your accounts receivable may be considered as debt by your factor. On the other hand, selecting the non-recourse option will pay you smaller but the factor will assume all the risks.

Understanding the differences between the two options can spell the difference between your business sinking or swimming.

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Taking Advantage of Transportation Factoring

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In the recent American Trucking Associations’ Management Conference and Exhibition, ATA Chief Economist Bob Costello took the podium and gave a matter of fact forecast on the trucking industry. In his speech, Costello said that “At the moment, fleets are expanding slowly.” Later on, Costello shared a nugget of optimism when he said, “However, once capacity does tighten, carriers will see improvement on their bottom line.”

Currently, freight rates are lagging behind the rising costs of fuel, employee recruitment, and equipment. Until capacities tighten, it is a good idea for carriers to take advantage of transportation factoring. To be short and sweet, factoring is the process of selling your accounts receivable to a third party company at a discount so that you can claim your money without waiting for the shipper’s payment in 90 days.

As a business owner, you understand the importance of being liquid all the time. There is no shame in availing the services of factoring companies even if other companies might think that you are having cash flow problems. On the contrary, you might enjoy the many benefits it offers.

Quick Financing

In this time of economic troubles, daily expenses can be problematic, especially when your cash flow is hampered by the shipper’s delayed payment. If you are facing this scenario, factoring will take away all your worries. You will be able to meet payroll, address unexpected repairs, or pay the bills.

If you are considering taking out a loan from a bank to boost your capital, just remember that banks are infamously slow in processing loan applications. It is possible that your clients have already made payments before you receive any loan money from the bank.

Reduced Costs

Suppliers will not give you any discount if you are also promising payment like your customers. However, with cash on hand, you can immediately pay for your needed supplies at a discount, reducing your overhead expenses.

Avoid Collection Hassles

Collecting payment can be very tedious. Moreover, it restricts your employees from performing tasks that are crucial for the growth of your company. If you want, you can also request the factoring company to do the collection for you, freeing up your employees to perform more productive duties.

Reduce Staffing

Aside from collection, freight factoring companies also offer credit checks. As a result, you do not need to employ additional heads just to investigate the creditworthiness of your clients.

Enhanced Business Management

Having money in your pocket opens up many opportunities that were not previously available to you. You now have the flexibility to offer customers attractive terms. Moreover, you can pay existing debt to improve your credit rating.

 

With expenses like fuel costs and employee retention rising faster than freight rates, trucking companies are looking at transportation factoring companies to provide badly needed cash. Other than access to quick financing, factors help in reducing costs and staffing, relieving you from collection worries, and facilitates improved company management. When capacity tightens like Costello said, you would not want to be on the sidelines just because you failed to explore this option.

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How to Choose a Manufacture Factoring Company

Until recently, US companies have relied on foreign manufacturing plants. These manufacturing plants are located in countries like China and Cambodia, where the labor costs are much lower. But in the last couple of years, many industry experts are saying that US manufacturing is poised to make a comeback.

There are several reasons for this new trend. One reason is that the current manufacturing scheme is becoming more expensive for US companies. Labor costs are increasing overseas, and it’s also becoming much more expensive to transport these goods from abroad due to high oil prices. Then there’s also the fact that US manufacturing is still the leader in terms of technologies. As Steve Forbes says, the resurgence of US manufacturing is because the US has more qualified people who have the proper training.

This is welcome news for the US manufacturing industry, so if you are part of it then perhaps you may be able to swing some sizable loans from your bank. But if your bank still has reservations or is taking too long to process your application, then you can always count on manufacture factoring services.

But of course, you need to pick the right manufacture factoring service. Here are some considerations before you make your final choice.

  1. Make sure the financing company fully understands your manufacturing business. Each type of manufacturing company has its own particular processes and challenges. A food manufacturing company is different from a computer parts maker.

So you need a factoring company which doesn’t just have experience in manufacturing but in the kind of manufacturing you’re involved in. This will save both of you a lot of time and frustration in negotiating a fair contract that’s amenable to both sides.

  1. Check the history of the management team of your factoring service provider. It’s not just the name of thecompany you have to check, but the names of the people running the factoring company as well. If the factoring company has a sterling reputation, make sure that the people running it have been involved in the company from the beginning. If they are new, check and see if the company they left has a good rep too.

You can’t be too careful. Some people have a bad impression of the factoring industry because of a few bad apples who took advantage of the credit crunch back in 2008, when the recession really had lots of companies scrambling for funding.

  1. Clarify the details of your factoring contract. The most important thing to clarify here is the amount or percentage of the accounts receivable you get in advance. Make sure that you know which conditions can affect this number.

Then you also need to determine how much you will pay to the factoring company. How much is the interest per month or per year? And if they are offering credit analysis, invoice management, and collection services, make sure you know what those things will cost you as well.

By choosing the right factoring partner, you can be part of the US manufacturing resurgence and take your manufacturing company to new heights.

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How You Can Expand Overseas with International PO Funding

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Click for Purchase Order Funding Quote

Growth has always been one of the most important goals of any business, and for your business that may mean opening new markets and client bases overseas. Of course, that can pose new risks for your company as well. Your bank may not be willing to give you the loan you need to fulfill all these purchase orders coming from overseas customers. But a lender that offers international PO funding will be definitely interested.

The way it works, is quite simple. If you have a large purchase order from a customer overseas, then the funding company offers you a percentage of that in advance. The percentage will depend on the reliability of that overseas company. You then get the money you need in order to fund the process that enables you to provide the goods the customer is asking for.

  1. Some foreign customers may not pay the upfront deposit. When a US company sells products abroad, it’s often SOP to ask for a deposit upfront before the company provides the goods. But not all customers abroad may be okay with this practice.

Some may take too long to come up with the traditional deposit, and they may not even be able to afford it. Other companies may simply be unwilling to put up the deposit, because it would then put a dent in their own cash flow reserves. These companies may then ask for (or perhaps more accurately, demand) open terms.

If you need that deposit to shore up your own working capital, then you may be forced to reject the deal, but with international PO funding you don’t have to anymore. Now you can boost your overseas sales with fewer restraints, while still enhancing your working capital.

That’s what the purchase order offers—the cash advance acts as the deposit in this case.

  1. Your bank may require you to purchase credit insurance. This may involve having to pay really high premiums. That can again put a strain on your working capital and make I more difficult for your business to operate. With the purchase order financing, you don’t have to buy the insurance any more. Your payment comes after the customer has paid in full. The payment goes to your lender, who takes the principal and the fees from the payment before the rest goes to you.
  2. Foreign purchase orders aren’t rated highly by many lenders. Even if you are considering some form of asset-based loans from your bank and other lenders, they may not consider your foreign purchase order eligible. But there are the assets that international PO funding companies are looking for.
  3. The risk may be too much for you. Even though the prospect of overseas growth is appealing, the very distinct possibility of write-offs may intimidate you. But the purchase order funding can protect you from such risks.

The world is getting smaller, and so is the domestic market. If you wish to grow, then that may mean selling overseas. There’s always the risk, but with purchase order funding then it can be a grand opportunity for more profits.

Potential Problems When Dealing with a Flooring Factoring Company

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One of the most basic rules when it comes to availing factoring services is that you should partner with a factor which has an extensive experience in your niche or industry. So this means that if you are a flooring subcontractor, you need to approach a flooring factoring company. It sounds simple enough but the reality isn’t exactly in black and white.

Here are some challenges you will face when searching for a flooring factoring company:

  1. There aren’t all that many factoring companies specializing in the subcontractor niche. Forget about factoring companies which specifically focus on flooring companies. You’d have a difficult time finding a factoring service for any type of subcontractor business. Factoring companies that provide services for flooring companies are extremely rare, so if you find one which has an extensive experience in the flooring subcontractor niche, you can count your blessings.

While you may find a factoring company who may be willing to help you out, their inexperience in your particular industry can make matters more complicated. The contracting industry is complicated, and explaining the details will definitely not be easy.

  1. What happens if you issue “applications for payment” or payment notices? Inexperienced factors may find it strange if you don’t use invoices at all, but many flooring companies like yours issue applications for payments in lieu of invoices. Since factoring companies use invoices as collateral, by not using an invoice you may have very confused factors which will need a lot of clarification before they can set up a factoring arrangement for your company.

An experienced flooring factoring company, on the other hand, knows precisely why you may want to issue payment notices as a way of reminding people that you need to be paid. What’s more, they also know how to use these payment notices in lieu of traditional invoices as basis to forward you the working capital you need.

  1. Some main contractors absolutely refuse to deal with factoring companies. In most cases a generic factoring company sends a notice to all your customers that the payments should go directly to them instead of to you. This is SOP, and in some industries (such as the apparel industry) everyone accepts this.

But this is not the case in the contracting industry. The main contractor tends to be someone who likes to deal with subcontractors on a personal basis. The inclusion of a factoring company may be seen as an intrusion, and they may not appreciate having someone they don’t know telling them when and how to pay for your flooring services. There’s a very good chance that this main contractor may no longer use your services in the future if you insist on using a factoring company.

But with a factoring company that has extensive experience in this industry, problems like this has a solution. The entire factoring service can be kept confidential, so that the arrangement can still continue without letting your main contractors know about the arrangement.

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Benefits of Factoring as Revealed in International Debt Factoring Case Studies

There are numerous debt factoring case studies which you can find online, and if you take the time to study them at length, you will find that debt factoring can even be more advantages than you previously thought. Debt factoring is an industry which involves many different arrangements, but with the right factoring partner you may be able to get the financing you need.

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In addition, you can get additional benefits which can foster greater growth for your company.

  1. You can get credit protection against customer insolvency default. The problem with many industries today is that if you wish to grow you may have to extend your operations overseas, and that can be very problematic. For one, if an overseas customer defaults on an invoice then you may have a very difficult time in getting the money owed to you for the goods you’ve delivered.

This is why some factoring companies offer total credit protection against such a contingency. You can then expand your business and get new customers abroad without having to insist on cash on delivery or a letter of credit.

  1. You can outsource receivables ledger bookkeeping. When you have numerous customers abroad, keeping track of all those receivables can be a huge task. You’ll probably need to setup a department to do this. Yet by outsourcing this task to an international factoring company (which is already set up to do this for you), you can then keep your overhead costs down. This may enable you to keep your pricing competitive to attract more customers.
  2. You can let the factoring company take over the collection process. If you think that keeping track of all these invoices is complicated, then you’ll despair at how convoluted and arduous the process will be when you need to collect your money. It’s one thing to have overseas customers, but it’s a more expensive proposition to have to set up local offices just to do your collecting.

But factoring companies have standing relationships with local collection services, which can then handle this job for you. Some companies don’t like using factoring services to handle collections because they’re not sure about how professional they’ll be, but that’s not a problem here. Since these are overseas customers, the local collection agencies used by the factoring companies would be better suited for task of collecting than anyone in your company. These people know the culture as they’re part of it after all.

  1. You can be protected from currency fluctuations. Another risk in international deals is that you there’s a possibility that the exchange rate can go against you. You’re essentially dabbling in Forex trading. But many debt factoring case studiesclearly show that you can also be protected from this type of risk. If you’re based in the US, everything in the contract with your factoring service will be in fixed US dollars regardless of the changes in the exchange rate.

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PO Finance for Apparel Distributors

Invoice factoring has long been a mainstay in the apparel business. If you are a distributor, when you supply clothing items to a retail store they can opt to pay you in 30 days—if you’re lucky. Sometimes the waiting period can be 45, 60 or even 90 days. Since you need the revenue from the sales as working capital for your next deals, you can partner with factors which provide immediate financing for these accounts receivable. But sometimes even that kind of financing isn’t enough, but with PO finance apparel companies can get the working capital they need. Purchase order financing is considered as a creative way to raise capital in order to meet a new large order.

What is PO Finance?

Essential, in PO finance apparel companies can get the money they need by using the purchase order as a form of collateral. The lender considers the credit of the customer who made the purchase order, and then calculates if your profit margin warrants the use of purchase order financing. If your customer, such as a well-known retail store, has a good reputation for paying their dues and if your profit margin is high enough, then you get the line of credit you need so that your supplier can provide you with the goods you require.

When Should You Get Purchase Order Financing?

In most cases, before applying for PO finance apparel companies should still try to get a traditional bank loan. Yet in reality, very few banks can get you the money you need quickly enough. Either the bank will be very reluctant to give you the funding you need, or their entire loan approval process is so slow that it won’t give you enough time to fill the order within the schedule indicated in the PO.

So if your company has a very small window of opportunity and you have no time to waste, you may as well apply for purchase order financing immediately. The process goes by more quickly, and this gives you the time you need to meet the specified delivery schedule requested by the customer.

Other Definite Advantages of PO Financing

The advantages of PO financing are well-known:

  1. You have a better chance of getting the money you need compared to securing a loan from a bank.
  2. The entire process is much quicker, so you don’t waste time in what may turn out to be a futile effort to gain the financing you need.
  3. The amount you need is based on known factors specified on the purchase order.

In many cases, when you apply for a loan you try to estimate the amount of money you need for working capital and for business growth. But with PO financing apparel companies can get their money on a “as needed” basis. Since you can easily calculate how much you need to have to pay your supplier, you don’t have to make a mistake in the amount of money you can ask for.

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