Many import companies will find it hard to pay their suppliers when a customer makes a big purchase. In the transactions, the importing company is supposed to make payment to the supplier using a letter of credit from which you await payment by the customers who have bought the goods. There are situations when a company lacks the funds to get a letter of credit and feels that it would take too long before they receive payment. Purchase order financing (factoring) is useful in such situations.
The tool is efficient and allows the company to make even very large orders. It does not matter whether a company is new or is facing a crisis so that it does not have enough to pay off its suppliers. The tool provides you with enough money to pay your suppliers and hence fulfill all the needs of your customers.
It works for almost all kinds of companies with very little requirements for qualification. All the importing company needs is a purchasing order from a reliable commercial customer or one from a government agency. Your customer must be reliable if you want a smooth transaction and this is the most ideal tool if a company imports products from multiple countries.
The tool works on a very simple principle. After a purchase is confirmed, the payments are made to the supplier by using the letter of credit. The transactions will be completed once the goods are delivered and payment is made. The cost will usually vary and depends on certain factors like the reliability of the customers, the complexity of the transaction and the size of order being made.
Although the tool might be effective for most of your transactions, it works best if you have profit margins between 15% and 30%. Besides, you should have large or medium customers or the government agencies for reliability. It is convenient and as you will realize, it cuts down on your extra costs if you utilize the tool the right way and meet the conditions given above.
If your area of specialization is distribution or reselling then you can use the tool to cater for customer orders which are large and exceed your financial capability. Most of the building business which run such an enterprise have used it to free funds which are otherwise used for more critical expenses. You should note that it is not cause debt on your business but rather it is a payment method.
It is possible to use the extra finance you draw for the tool in applying for discount offers and concurrently your business will be approved for more funding. Most of the times it is seen as incredible tool which will help your business grow with the ability to make large orders even if you do not have the funds. With this plan the ownership of the small business is fully yours and you do not need to partner.
It is easy to qualify for the purchase order financing if you are importing tangible products to businesses which have a good reputation in paying for what they request. It is also possible to qualify if you have good prospects for growth, which is proven with a purchase order. With the tool, you will no longer need a banker or an investor and the whole business will always belong to you.