The opportunities for Canadian and US businesses in international trade have never been better. But with this expanding market comes its own unique challenges. Some of the challenges faced by wholesalers, resellers and distributors in Canada and the US when dealing in international trade include:
- foreign suppliers who want to be paid prior to supplying goods...while your clients want to pay in 30-90 days
- a traditional banking system that just doesn't "get" what international trade is all about
- the challenges of working with suppliers in different countries with different currency, import/export and banking laws
- the challenges of distance and language barriers
Often these types of businesses who deal in international trade find it difficult to obtain financing from traditional sources like the bank.
Purchase Order Financing to pay foreign suppliers
Purchase Order Financing is ideal for Canadian and US wholesalers, resellers, distributors and similar businesses that purchase completed product from suppliers to resell at a markup. It provides the funds to pay suppliers upfront while you wait for payment from your customer. The main qualification requirement for Purchase Order Financing is that you have an approved Purchase Order from a creditworthy customer.
How Purchase Order Financing works...
- Your business signs a Purchase Order Financing agreement with a factoring company.
- The factoring company approves and sets you up in their system for accepting purchase orders, subsequent invoices and tracking payments.
- You send an approved purchase order to the factoring company along with supplier information.
- The factoring company:
- checks credit information for your customer to determine their creditworthiness
- reviews the requirements for delivery of the final product and, in most cases, creates a Letter of Credit to pay your supplier
- issues the Letter of Credit to your supplier which stipulates terms of payment
- You receive product from your supplier and deliver it to your customer. You create an invoice and forward it to the factoring company.
- The factoring company invoices your client for the product.
- Upon payment of the invoice by your customer, you receive the balance (invoice minus amount paid to supplier, minus the PO Financing fee).
In effect, you've paid your supplier without any out-of-pocket costs until your customer has paid their invoice.
How using a Letter of Credit helps in international trade
In international trade, Letters of Credit are simply the preferred way of doing business. Certain suppliers aren't comfortable offering C.O.D. terms, but will accept a Letter of Credit in lieu of paying for goods before they're delivered. A Letter of Credit provides the assurance your supplier needs to know they'll be paid without paying cash before your product is received. It also outlines the terms the supplier needs to meet before they'll be paid.