| Q |
What
is Purchase Order Financing? |
| A |
Purchase Order Financing is
a solution for companies who have purchase orders from
strong customers, but lack the cash flow to complete the
sales.
|
| Q |
What
does it cost? |
| A |
International Trade Finance has a two-tier
fee structure, consisting of a flat service fee and an
interest fee on any actual balance outstanding.
The flat fee can range anywhere from 8-12% on the costs
and Letter of Credit amount, based on the size and risk
of the transaction. An aspect that may be considered
high risk is a volatile industry like commodities, electronics,
and garments. Another may be a large number of suppliers
or end buyers involved in a transaction. Features that
merit discounts include commitments to finance large
volumes over time and the involvement of a Factor.
Should the supplier only draw on a partial amount of
the full value of the Letter of Credit, the flat fee
will only apply to the amount actually drawn.
The interest rate is 21% per annum (1.75% per month)
and is accrued on a per diem basis. Some clients have
buyers that pay less than 30days from shipment under
a sight Letter of Credit, and in cases like these, clients
are never charged for the full 30days. Many clients
factor the generated receivables before a usuance Letter
of Credit draft matures, so the only outstanding balances
are the minimal costs of issuing the Letter of Credit.
|
| Q |
Is there an application
fee? |
| A |
No, there are no upfront costs to our clients.
All fees are collected by International Trade Finance
from the buyer’s invoice payments at the close of
each transaction.
|
| Q |
What is the minimum/maximum
transaction? |
| A |
Technically, there is no minimum Letter
of Credit amount, but there is a minimum flat fee of $500
per transaction. At an 8% rate, the Letter of Credit would
need to be at least $6,250 to meet this minimum. However,
keep in mind that because of the costs of issuing a Letter
of Credit (bank charges, document transport, etc.), it
is usually beneficial for our clients to use Letter of
Credits for shipments greater than $10,000.
The maximum for any transaction depends on the buyer’s
credit, because this buyer will become the account debtor
once you have completed shipment and fulfilled the buyer’s
purchase order. The maximum on a sight Letter of Credit
is $250,000. The maximum on a usuance Letter of Credit
depends again on the buyer’s credit, as well as
the terms of payment.
|
| Q |
Is
there a term commitment? |
| A |
No. If your company’s obligations
are met, you may choose to terminate the agreement at
any time. Furthermore, your company is not obligated to
finance a minimum volume, nor is your company obligated
to finance every purchase order.
|
| Q |
Does International
Trade Finance require personal guarantees? |
| A |
Yes. International Trade Finance will always
look at the merit of the transaction first, but we will
then look to the strength of your company and its principals
to cover any risk we see in the transaction.
|
| Q |
Are the Letters
of Credit bank-issued? |
| A |
No. International Trade Finance issues it’s
own Letters of Credit, but the Letters of Credit are advised
through a bank so the beneficiary and beneficiary’s
bank know the Letter of Credit is authentic. Regardless
of the issuing entity, an authentic Letter of Credit is
subject to the all the rules and regulations stipulated
by the Uniform Customs and Practice for Documentary Credit
ICC (International Chamber of Commerce), Publication No.
500.
|
| Q |
Are the Letters
of Credit confirmed? |
| A |
No. Confirming Letters of Credit would require
the client to cash secure the transactions and most clients
are not in the position to do this.
|
| Q |
What is the difference
between a Sight Letter of Credit and a Usance Letter of
Credit? |
| A |
Sight Letters of Credit indicate that the
drafts drawn are due upon presentation of the shipping
documents. ICC rules allow International Trade Finance
and your company 7 business days to review the documents
for discrepancies before accepting or rejecting the documents.
Upon acceptance, International Trade Finance makes payment
to the Letter of Credit beneficiary according to the instructions
on the draft. If the documents are rejected, International
Trade Finance advises the beneficiary’s bank of
the rejection and waits for instructions on how to dispose
of the documents. The goods cannot be released if the
documents are rejected.
Usance Letters of Credit allow a specified number of
days from the Bill of Lading date or from the presentation
of the documents, before the draft matures. Again, ICC
rules allow International Trade Finance and your company
7 business days to review the documents for discrepancies
before accepting or rejecting the documents. Upon acceptance,
International Trade Finance advises the beneficiary’s
bank of the maturity date and makes payment to the Letter
of Credit beneficiary accordingly. If rejected, International
Trade Finance advises the beneficiary’s bank of
the rejection and waits for instructions on how to dispose
of the documents. The goods cannot be released if the
documents are rejected.
|
| Q |
Who qualifies? |
| A |
If you have purchase orders from a credit-worthy
buyer, and your gross margins are greater than 20%, you
can qualify for Purchase Order Financing. Letters of Credit
work for suppliers who do not need prepayment to ship
the goods. Suppliers demanding deposits or T/T payments
are often will to negotiate better terms with Letter of
Credit.
|
| Q |
What is Accounts
Receivable Factoring? |
| A |
Accounts Receivable Factoring is a facility
many of our clients use to avoid waiting 30-45-60 days
for buyers on account to pay. A Factor essentially buys
your invoices at a discounted rate as soon as it can verify
the completed shipment with the account debtor (your company’s
buyer). For a small percentage of the invoice, your company
can take advantage of immediate cash. It is not necessary
to Purchase Order Finance a transaction to qualify it
for factoring.
|
| Q |
What is a UCC-1
Financing Statement? |
| A |
A UCC-1 Financing Statement is a type of
lien that secures a creditor. Many equipment lease companies
use a UCC-1 that specifies a machine as collateral. If
the debtor defaults on payment, the UCC-1 allows the equipment
lease company to repossess the machine. It is typical
for banks to use blanket UCC-1s to secure lines of credit,
designating the debtor’s assets as collateral, and
International Trade Finance utilizes the same. UCC-1s
are public records and are indicative of a debtor-creditor
relationship. By itself, a UCC-1 is in no way an indication
of a delinquent account. |
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