The New Reality of Import PO Financing in 2015
As China devalues its currency, cheaper Chinese imports are creating strong opportunities for United States importers. At the same time, with a growing middle class, China is now the third largest US export destination just behind Canada and Mexico. US exports to China have increased 198 percent over the past 10 years, higher than any other country, stated the US-China Business Council in its 2015 annual report.
As China shifts towards a consumer-driven growth model, the world’s factory of today will become the world’s largest importer and the world’s market in the next decade. Trade and financing go hand-in-hand with approximately 90% of the world’s international trade being financed. Trade lines through banks are limited for many companies, but being transaction driven, Paragon Financial can fund over and above the usual bank constraints. We typically fund all landed costs of goods imported.
In addition to Invoice Factoring with Credit Protection, PO Funding is also offered by Paragon Financial to either buy the goods for you via Cash against Documents (CAD) or a Letter of Credit. Another reality is that many Chinese companies no longer want letters of credit, as China’s banking issues make it difficult for factories to monetize them as in the past. You can also utilize Paragon’s credit worthiness for your supplier to release the goods and be paid from the Invoice Factoring proceeds via a Vendor Guarantee. A Vendor Guarantee is the less costly for you because of the reduced risk and paperwork. Typically Paragon will contract with your supplier to pass enough of the factoring proceeds on to them to cover the supplier’s invoice to you.
Cash against Doc’s can be FOB China or FOB US. Of course, FOB China is higher risk than FOB US and the money is out longer. There is also the real risk of your supplier not meeting quality, quantity and timeliness standards even with proper documentation presentation. In addition, unlike Invoice Factoring, PO Financing has the risk of product rejection by the account debtor (your client). It is also based on what we pay your supplier, not the invoice amount. Any deposit you make to the supplier will reduce your overall cost of funds …
Note: Your goal should be to get your supplier(s) comfortable enough with you to take a Vendor Guarantee as your costs will then be reduced significantly.