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.
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.
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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