Be Clear on the Currency and Rate in Your Contracts

At the beginning of 2008, SourceJuice published an article titled 4 Reasons Sourcing from China will be More Expensive in 2008 discussing the various reasons to expect costs in China to rise. One of the main points was that the Renminbi (RMB) is appreciating against the US Dollar (USD).

We were again reminded of this by the China Law Blog, with their post Yuan/Dollar Exchange Rates. They also reference an article by CNReviews.com titled RMB appreciation and the emergence of a new Asian reserve currency. While both are good reads in general if you’re interested in currency analysis, the important point from a sourcing perspective is: Specify the Currency and Rate in Your Contract!

Spending time negotiating prices is only one part of the puzzle. As you can see in this 2 year chart from Yahoo Finance, the USD vs. RMB chart is pretty ugly. And many are expecting the USD to fall significantly further.

This creates uncertainty. For example, if you price your goods with the factory in USD, the factory is going to want to raise the price on you when the USD depreciates further. However, if you price the goods in RMB, you’re going to be spending more dollars than you expect, and possibly eroding your profit as a result.

April 8, 2008 | Filed Under Currency & Finance | 1 Comment

Show Me The Money! Searching for Investment For Your Import Venture? Part 1 of 2

Have an idea for a new product? Got a sale, but no operating capital to import the goods? Finding the players that can help get your new import venture off the ground with financial backing and investment is a game in itself. Sourcejuice has the stats you need to get playing on a major league team.

Specialty/Boutique Investment Shops
When faced with a temporary liquidity “crunch”, the first call many companies make is to traditional factoring firms and asset-based lenders only to be told “you must first finish and ship the order to create the receivable before we can lend”. There are a number of commercial financing firms that specialize in the high-risk arena of providing “gap” financing to small manufacturing companies or importers, helping them fulfill purchase orders. Such “gaps” in the working capital necessary to pay for the materials and labor involved in producing the “finished goods” often occur because a small manufacturer has already exhausted existing bank lines and does not have other capital availability, or because it has been “swamped” with more orders than it can handle with its existing credit lines.

For a step-by-step run through of how “purchase order” financing works, check out Cameron Addair’s article in the “Share Your Expertise” series.

Traditional Bank Loans
Credit is the name of the game here and as soon as you walk into that branch (doesn’t matter which) you know the drill. If you have the credit score, open/available credit and believe in your ability, the sky is only limited by what they will loan you on a “personal” or “business” loan/line of credit. Don’t expect any special lending for importers as it is not there. A personal loan is going to run you, with good credit, starting at 14% APR. This option is risky and expensive, but with $25,000 you can import about whatever you need/cover all your expenses. Check into your options in regard to membership opportunities at your local credit union. Don’t forget to check the home equity line option with lower interest rates.

Bank of China Trade Finance
The Bank of China is marvelous, point blank. With over 90 years experience in international banking they are a vital asset for doing business in China. Their New York branch provides a plethora of investment options for the importer. Stay Tuned to part 2 of this SourceJuice thread for these options in their entirety. In the mean time here are some links to get you started.

The Bank of China

Main website

New York Branch website

410 Madison Avenue (on 48th Street)
New York, NY 10017
Tel: 212-935-3101
Fax: 212-593-1831

Services: A wide variety of products and services to facilitate your international import and export activities. Experienced professionals that know how to balance risk and pricing and provide you with the best financial services possible. Credit lines ranging from $1,000,000 to $30,000,000 can be structured to customers with at least three years’ satisfactory operating history.

Angel Investment
It is all about who you know. If you know one or many angel investors, the sky is only limited here by your investor salesmanship.

Partnerships & Consulting Practices
There are other ways to get your products imported without any capital at all. Find a company to partner with or from which to consult. You can get someone else to pay for your time and import costs. Cut a deal where, for a reduced consulting cost to them, they let you set aside some inventory for yourself. The key is to keep your eyes open for companies such as yourself for which you can market your services. You might have to get into bed with the competitor to do it, but better to get in the game than sit on the sidelines and watch.

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dylan@sourcejuice.com // Dylan Blankenship

March 19, 2008 | Filed Under Currency & Finance | 2 Comments

Share Your Expertise: Cameron Adair on Purchase Order Financing

Purchase Order Gap Financing as applies to U. S. Manufacturers sourcing Contract Manufacturing at Facilities in China.
By: Cameron Adair

Many small manufacturing operations in the U. S. have sought “gap” financing from private (non-bank) “factoring” firms and asset-based lending firms in order to complete and ship a contracted order to a customer. Such “gaps” in the working capital necessary to pay for the materials and labor involved in producing the “finished goods” often occur because a small manufacturer has already exhausted existing bank lines and does not have other capital availability, or because it has been “swamped” with more orders than it can handle with its existing credit lines.

When faced with a temporary liquidity “crunch”, the first call such companies make is to traditional factoring firms and asset-based lenders only to be told that, “We can lend against your receivables from your customers, but you must first finish and ship the order, and create the receivable. We can’t help you with the funds you need to complete the manufacturing process; we can only help you after the goods are finished and shipped.”

This is the prevailing “norm” as most factoring firms and similar asset-based lenders can only lend against receivables, and they are looking at the creditworthiness of the customer as their collateral, and not to the manufacturer. They cannot lend against “work in progress” or “purchase orders” for goods that have not been finished and shipped. This, of course, does not help the small manufacturer who still needs temporary cash availability to complete the purchase order and ship the goods to the customer.

There are a number of commercial financing firms that specialize in the high-risk arena of providing “gap” financing to small manufacturing companies to help them fulfill purchase orders. These “purchase order factoring” operations range from a handful of firms with a national footprint, to various regional firms and some finally to some very localized operations. There is no easily-defined industry group of such firms, and most small manufacturing companies have a difficult time finding out who to call, and what few firms there are that may even take a look at their “gap” financing needs in order to complete purchase orders.

Typically, “gap” financing firms will advance funds for raw materials and direct labor to get a set of goods covered under a purchase order completed and shipped. In general, most such lenders will only advance a portion of the funds needed, and the manufacturing company must have as much of its own working capital employed as possible (rarely can 100% of the cost of materials and labor be financed). These lenders will usually disburse directly to the materials suppliers, and wire funds to the payroll account on payday, in order to minimize risk, and will take a lien on the “work in progress” and finished products until the goods are shipped. At the point of “shipment”, when an invoice is sent to the customer and a “receivable” is created, the “gap” lender is typically paid (and the lien released) by an advance from the factoring firm that will “kick in” and lend against the newly-created “receivable” from the manufacturer’s customer.

“Gap” financing is expensive, usually 50% higher (on an annualized APR comparative basis) than the costs imposed by “receivables” factoring firms. It should only be used to the minimum extent necessary to complete and ship an order, and only be “drawn” upon for the least amount of time while the “interest meter” is ticking. A manufacturing company must have sufficient margins in the goods being produced to be able to “afford” such gap financing, and it can only be viewed as a temporary “means to an end”. Nevertheless, purchase order “gap” financing can make the difference between a company completing and shipping an order, and thereby keeping a good customer, as opposed to losing the order entirely. It can also provide temporary “relief” during periods of increased demand by customers when a manufacturer is unexpectedly “swamped” with orders and does not have the bank lines to meet these needs.

The need for purchase order financing gets more complicated for small U. S. manufacturers who, more and more in recent years, wish to contract to have their goods (or components of their finished goods) manufactured for them in China. Chinese manufacturing plants require advance deposits and payment in full prior to shipping. The cost of shipping from China and landing the goods in the U. S. must also be paid “up front”. For a U. S. company that has the capital, this process can tie up funds for a significant period time. But, for the U. S. company that must borrow some of these funds, the interest costs can become very expensive, especially while the meter is “ticking” during the overseas shipping process. Chinese manufacturing firms and shipping lines do not extend credit to smaller, “foreign” companies, and for a U. S. company, final payments are due when the goods are delivered “FOB” at the shipping port.

There is no easy answer to this dilemma. Larger, credit-worthy U. S. companies can arrange bank lines and letters of credit to handle their contract manufacturing and shipping costs in and from China. But for the smaller U. S. manufacturer with a limited capital base and bank credit facilities, the “mission” may be very difficult to achieve if not impossible.

Our affiliated commercial lending firms have provided “gap” financing to some smaller U. S. manufacturers in recent years to help fund contract manufacturing in China. This has been done on a case-by-case basis, and whereas our results have been favorable (i.e., as a lender, we have gotten repaid with the interest due), the costs to the borrower have often exceeded what was originally expected due to unforeseen delays and other “snags” in the process.

To be of help where possible, our affiliated lenders have recently organized a central “clearing house” to “field inquiries” from small U. S. manufacturers who need “gap” financing for contract manufacturing in China in order to “vet” each inquiry and see if we can match the manufacturer with a gap financing source that can meet their needs. To date, our affiliates have been able to work with only about one-third of the companies that have inquired; however, this still provided a source of much needed financial help to some companies who otherwise may not have been able to source such financing elsewhere.

ABOUT THE CONTRIBUTOR

Cameron Adair is Chairman of ADG Group in Atlanta, a merchant banking firm with interests in specialized commercial financing companies and consumer financing companies.

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Sourcejuice is not paid or affiliated with Cameron Adair or the ADG Group, but is assisting readers to navigate the possible necessity of contacting or inquiring such a firm for their respective services.