Trade Financing Options

Are you selling goods or services both in the US and internationally? Then you know that finding the right financing tools is critical for the success of your business. Although finding the right business financing for US based transactions is not simple. Finding the right financing for your international transactions can be exponentially more difficult.

The most common tool used in overseas transactions is the letter of credit. A letter of credit is a payment vehicle that guarantees payment to suppliers and ensures that clients get the products/services they contracted for. The challenge with letters of credit is that they are as hard to get as a business loan. If you or your business cannot qualify for traditional bank financing, then more often than not you won’t be able to get a letter of credit. Unless, of course, you find an alternate business financing tool.

This is where factoring and purchase order financing come into play.

Factoring financing has been around for a very long time. But only recently has export financing (or international factoring) become a popular tool to finance international trade transactions. Factoring is a way to help business owners who cannot afford to wait 60 days to be paid by their international customers.

Factoring provides you with financing based on your international invoices from credit worthy commercial customers. Basically the factoring company advances you up to 85% of your invoices and holds 15% as a reserve. The factoring company waits to get paid while you get use of the funds. The remaining 15% (less a fee) is rebated as soon as your international customer pays the invoice. Furthermore, most factoring agreements will protect you from the credit risk.

Purchase order financing is a bit different. It helps distributors, resellers and wholesalers who have large purchase orders but can’t afford to pay their suppliers. The PO financing company covers all supplier expenses and helps with the delivery of the goods. The transaction is settled as soon as your customer pays the invoice.
As opposed to most business financing options, factoring and purchase order financing are easy to obtain and can be set up quickly.