Purchase Order Financing for Importers


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TEFO Home About TEFO Management Team Products & Services Trade Glossary Import Finance Tutorial Export Finance Tutorial	Purchase Order Financing for Importers Introduction A Purchase Order (P.O.) is a legal agreement signed by a buyer requesting a seller to provide goods or services. Purchase Orders normally list the amount of goods or services required and the terms and conditions of delivery and payment. Major North American buyers will normally issue a P.O. requiring extended payment terms such as "Net 30 days." Overseas suppliers will usually ask for COD or sight draft Letter of Credit terms. For a middleman importer, this difference in terms of purchase and terms of sale can create a cash flow nightmare. Purchase Order Financing can be an important part of a solution to this cash flow dilemma. P.O. Financing is a short-term funding technique used to finance the purchase or manufacture of goods that have been pre-sold to a creditworthy customer. The funding is collateralized by the purchased inventory and confirmed purchase orders. Funds may be used for issuing Letters of Credit or cash payments to suppliers to obtain the finished goods, raw materials and/or direct labor required to fulfill the Purchase Order. P.O. Financing is considered a risky form of financing requiring extensive due diligence resulting in high cost. Only a handful of finance companies in North America have the experience and skills to perform this financing for the importation of product to fulfill Purchase Orders issued by North American Buyers. Example California Accents is a San Francisco-based importer and distributor of kitchen and bathroom tile. The company has worked for more than a year to land a big order from Home Depot - the largest home improvement retailer in the United States . Finally a sizable Purchase Order in the amount of $426,000 arrives from Home Depot. The P.O. requires that California Accents must deliver product in 120 days and must extend 60 days open account terms. California Accents quickly contacts their tile supplier in Sri Lanka . The factory manager says that they can ship the tile in 45 days for a cost of $312,000. However, they must have a Sight Draft Letter of Credit (L/C) in the amount of $312,000 to help them get the financing they need from their bank to fulfill the order. California Accents doesn't have $312,000 in operating capital and their bank regrets to inform that they can't help - the company has already "maxxed out" their credit line. California Accents calls TEFO. We evaluate the options and recommend Import Factoring. We bring in a top level Import Factor company. The factor has worked with Home Depot receivables before and they report the client is an excellent credit risk. They will finance the 60 days Accounts Receivable that will be generated from the transaction. But the Factor advises that they only finance Accounts Receivable. That means they won't provide any funds until the product has been shipped and accepted by the Home Depot. California Accents still needs the cash, credit or a strong guarantee to get their bank to open a Letter of Credit for the supplier in Sri Lanka . The Letter of Credit will get the supplier to manufacture and ship the tile so California Accents can deliver product to Home Depot. At that point, California Accents can convert the Home Depot shipment to the 60-day Accounts Receivable. TEFO calls in a specialized Import Purchase Order finance company. After intense due diligence the PO company agrees to have their bank open a Letter of Credit for $312,000, on behalf of California Accents. The Sri Lanka manufacturer, as L/C beneficiary, ships the tile and is paid by the bank. When the tile lands at the Oakland Shipping Terminal it is delivered to Home Depot. An Accounts Receivable in the amount of $426,000 is generated. The Factor company finances the receivable by paying off the PO company and their bank. At the end of 60 days Home Depot pays the Factor the $426,000. The Factor repays itself for the factor discount and sends the remaining funds to California Accents. Prerequisites Must be a USA company with principles residing in the United States . Goods must be pre-sold as evidenced by a confirmed purchase order. The purchase order must be unconditional, non-cancelable. Must have a viable purchase order from a credit worthy customer or a Letter of Credit that satisfies credit criteria. P.O. may not have a consignment or guaranteed sale clause. The company issuing the purchase order must be substantial, preferably publicly traded. Issuing company must be credit worthy with a track record of paying their bills Client company must demonstrate a clear business history. Client company must have history of selling the goods identified in the P.O. Supplier must have proven ability to produce the goods. Supplier must be able to meet the ultimate buyer's terms and quality criteria. Ready-to-ship, finished goods are easier to finance than non finished goods. The purchase order must be for a product not a service. The transaction or a contracted series of transactions must be valued at a minimum of $200,000. The transaction must be profitable for all parties. Client must be in business for at least two years. Client must have experience and previous transactions with Buyer or similar Buyers. The more complex the transaction the more experience company should possess No Commercial or Residential Construction deals accepted Must retain a minimum of 20% profit on each transaction Purchase Order Financing may be utilized for the following costs: Deposits Raw Materials Components and Sub-Assemblies Project-specific Labor Finished Goods Overhead Direct Manufacturing Shipping Letters of Credit Letters of Guarantee Capital equipment Advantages To Importer Provides 100% funding for cost of goods on drop-ship type sales. Supplemental source of financing beyond what your bank is able or willing to provide. Financing used to fulfill purchase orders resulting in increased sales. Allows smaller companies to handle big sales through leverage of others money. Enables growth without increased bank debt or selling of equity. Enables cash purchases resulting in better prices and discounts from suppliers. Enables marketing to major new accounts. Financing does not increase debt load. Financing can be for a one-time transaction or a series of transactions. Purchase Order financing entails the sale of an asset not the acquisition of a loan. There is no negative impact on your balance sheet or debt to repay. Purchase Order financing may be used with factoring or bank A/R financing. Disadvantages To Importer A highly skilled, specialized P.O. financing lender is required. Due diligence is extensive and time consuming. Lenders consider PO Financing a high risk form of financing. Reflecting perceived risk, the costs for this financing can be high. Funds or Letter Of Credit will be sent directly to your suppliers. May need to coordinate security interest in purchased assets/inventory with your bank Due Diligence Process Purchase Order financing company will check, review and verify the following: The exact deal structure, production and delivery timing and the flow of funds. The credit quality and payment history of the issuer of the Purchase Order. The credit quality, background, references, reputation of the client company. The validity of the Purchase Order. The terms and conditions of the Purchase Order. The profit calculations for the transaction. The shipping documents, and relevant insurance. Potential liens, encumbrances, judgments. Options for credit insurance. The history and credit of your suppliers. Title search on the collateral for the funding - product, invoice(s), assets. Required Information Completed Purchase Order Application Form. Copy of Pro forma invoice to buyer. Copy of Pro forma supplier's invoice. Copy of Pro forma purchase order sent to your supplier. Profit calculations on transaction. Most recent corporate Financial Statements (P&L/Balance Sheets). Most recent Financial Statement of all principals of company. Most recent company tax return. Credit information on buyer. Supplier information. Copy of Articles of Incorporation or Partnership Agreement. DBA filing, if applicable. Short biographical history of company, products, markets, objectives, strategy. Short biographical history of principals of Company related to experience. Cost of PO Financing Each Purchase Order transaction is individual and unique. Therefore the PO financing pricing varies. Fees commonly range from 4% to 8% of the gross amount of the Purchase Order. Final quote won't be given until a thorough due diligence has been completed. The greater degree the materials being purchased are to be manipulated or changed impacts the complexity, risk and cost of this financing. Costs can depend on the following factors: Credit quality of your customer buyer Type of goods being produced Whether the goods are finished or non-finished products Terms of the Purchase Order Amount of time from funding to collection Reputation of your suppliers Total cost of your transaction must include the potential additional costs of Letter of Credit issuance and the costs to finance or factor the accounts receivable period. Copyright © 2004, 2005 Ted S. Eastman. None of the contents of this article may be reproduced or republished without the express permission of the author		We take your privacy and the security of your company's information very seriously. Please view our privacy and security policy.
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