3 Ways to Finance an Import Business
Avoid Cash-Flow Problems With Financing Methods
Imports are goods and services that cross into a foreign country for resale. An import business can be profitable because of the low cost of goods available for import from countries such as Korea, China, and Mexico. Once the products are in the United States they can be marked up and sold for a profit. The difference between your costs and your gross income is your net profit.
How Money Flows in the Import Business
While it's possible to make good money importing and reselling goods, it may be difficult to get bank financing for an import business.
Before you import goods, you will almost certainly need funds to prepay manufacturers for goods and shipping costs. Depending on your manufacturer's schedules, that means your money will be tied up for at least 30 to 60 days before you have products to sell.
Meanwhile, if you are selling your products to businesses or big-box retailers, you won't be receiving cash on delivery. In fact, many such customers pay their invoices 30-60 days after receiving your products. That means another month to two months of waiting for cash.
In short, before you make a nickel you will need to pay out for up to four months. Your expenses will include the cost of products, shipping, and capital expenses. Without significant funding, you could go broke before even getting started.
Three Ways to Fund Your Import Business
Imagine knowing that you'll make a profit as soon as you sell your imported goods, but having to close your business before you have a chance to sell. You can avoid that frustration by using one of these three methods to generate up-front funds.
- Asset-Based Loan: Factoring accounts receivable is simply selling your credit accounts or accounts receivable to a commercial finance company, bank, or other financing company. Accounts receivable are sold at a discount, usually 80-90% of the face value of your credit accounts. The factoring company gives you an advance payment, for a small fee of 2-3%, for the accounts you would normally have to wait on for payment.
- Use Inventory: Even though inventory financing can be expensive, it is a very effective way of financing this type of business activity. You use your current inventory to secure a loan to allow you to buy the imported goods your customers desire. This allows you to increase your inventory without impacting your cash flow as long as you think you can service your debt. There are three types of inventory financing you can pursue depending on your needs. You can use a blanket inventory lien, floor planning, or field warehousing.
- Purchase Order Financing: This is similar to factoring your accounts receivable. It goes one step further. You take your invoices or purchase orders and assign or sell them to a commercial finance company, which assumes the risk and the task of billing and collecting. After the products are manufactured, the commercial finance company collects from the customers, takes its cut of the proceeds, and pays you the profit. Purchase order financing is certainly not as cheap as a bank loan. If banks aren't loaning money, however, it is an option. If your profit margin is high enough for the goods you are importing, then purchase order financing may be for you. It is important, with purchase order financing, that you have a good supply chain and creditworthy customers.