Technology in the 21st Century - Your own factory and catalog showroom for almost no money!

Thousands of our readers are buyers who work in large companies to their own retail or wholesale businesses. Many use China and other countries around the world to base their manufacturing, if not sourcing operations. Many also outsource the entire production of their private label products to a host of companies in China that run the gamut of design, develop, manufacture, package and even drop ships the final product to the end customer.

Most however, must to some degree, own the merchandise in some form or pay for its development prior to sales. Recently, with the advent of the Internet and advancements in technology, a whole new market has been created where you really can own your own factory and catalog showroom for almost no money AND get drop shipments. This is definitely not for the big companies but for those owning their own small business to those that setup shop in Ebay to TaoBao and want to create unique products and use the technology of the 21st century, then this company and its business model may be just right for you!

Enter Ponoko – technology in the 21st Century.

Ponoko is the world’s first personal manufacturing platform. It’s the online space for a community of creators and consumers to use a global network of digital manufacturing hardware to co-create, make and trade individualized product ideas on demand.

The ponoko.com marketplace connects creators, consumers, digital manufacturing hardware and service providers to promote, make and trade products on Ponoko and social networking websites.

Here is more information from Trendwatching.com from their 8 important consumer trends for 2008.

New Zealand-based Ponoko (which works like a CafePress for 3D objects) is offering consumers a new way to turn their creative ideas into real-world objects. After uploading their own design to the website (in EPS file format), or choosing a free design, users can choose from a variety of materials. Ponoko then runs the design through a laser cutter. Besides offering access to professional tools to manufacture products, Ponoko also helps users bring their products to market. Once they’re ready to sell, members can add photos of their product to their profile page, together with a description and pricing information. Products can either be delivered to the designer for assembly before being shipped to customers, or self-assembly products can be sent directly to the end-customer. Ponoko currently only offers two-dimensional sheet cutting, which limits designs to flat objects or three-dimensional objects that can be assembled from flat pieces, but plans for 3D printing are in the works.

As well as being a manufacturing platform, Ponoko also serves as a community where fledgling one-off fabricators and designers can exchange ideas and help solve each other’s problems. The larger goal, according to Ponoko, is to be a catalyst that helps bring personal manufacturing of individualized products to the masses.

So when you get to the point where you are doing well with this business model, come back and share your stories and we may conclude with the possibility that by that time, China may be once again the place where you scale your business. So, yes, China is still in the picture and so is good old manufacturing!

April 13, 2008 | Filed Under Sourcing | Leave a Comment

Get Rich Quick? Thinking Bigg!

Do you ever watch television really late and see the guy selling that new real estate (become a quick millionaire) marketing package? Have you said to yourself “That can’t work…. can it?”. The answer to that question is no, it can not. However, if you are looking for a great success story then look no further than Dave Novak.

Novak is the classic “40 Hour Work Week” example. He was a cubical slave/art director turned shower and spa importer and eBay seller powerhouse. He dove into the high end spa market after concluding that there was so much margin purchasing from China that he could turn a huge profit selling at wholesale cost direct to consumers. With no experience, and for that matter, no idea if anyone would buy such a product on ebay, Novak became a success by being bold and thinking big.

I was turned on to this story by a great friend and colleague who peaked my interest one day with an email reading nothing but Novak’s website address and this question: “Dylan…doesn’t this guy remind you of the old days importing granite?“. Novak indeed followed a similar path to my own importing granite. I found a niche market, the margins were high, but would people buy?

Fortune favors the bold, Novak invested $2,000 in savings and continued to double his investment finally to the tune of $2,500,000 over a two year period. So what is Novak going to do with all that loot? Sell subscriptions to his “eBay Millionaire Secrets” website of course.

While my story starts out very similar, with a home-run importing granite, my experience with suppliers has not always been easy. Importing modular kitchen cabinets is a prime example of this and changed my approach to international trading. This is about someone who took a risk, found an opportunity in a niche market and like in poker, went “all in”. Dave Novak has been featured on Fox News, GoDaddy and StartupNation Radio. What his interviews don’t tell you is that there will always be bumps in the road along the way. Using SourceJuice as a forum, I invite Dave Novak to “Share His Expertise” on perseverance, a quality that goes hand-in-hand with success.

Every major company in the world has been started by risk takers who learned as the company grew. SourceJuice is here to educate you, excite you, inform you and learn from you through Sharing Your Expertise. We at SourceJuice celebrate all those that take the risk to do something.

So the core question that is in the forefront of everyones’ minds when doing business internationally or in China:

Is it possible? - Yes! Are there risks? - Yes.

Should I do it? - Do your research, read SourceJuice.com, invest in solid due diligence, scrap the idea and start over, talk to anyone and everyone that has done business in China…. and then the answer is Yes.

When I mean read SourceJuice, I mean read:

About real people like you that have persevered: Beware the Middleman and Seek the Intermediary
Success Stories: The Holy Grail of Risk Taking Entrepreneurs: Brits Get Rich in China
The most valuable of stories, experience: Share your Expertise Series - David Anderson on the China Granite Industry
How to get your business into motion with funding: Show Me the Money! Finding Investment For Your Import Venture
Everything you need to know to make sure the numbers will work: Digging Deeper Series - Actual Landed Costs Examined

Dylan Blankenship signature
dylan@sourcejuice.com // Dylan Blankenship

April 11, 2008 | Filed Under China Business | Leave a Comment

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

Reminder: Understand VAT Rebates to Bargain More Effectively

At the beginning of the year, SourceJuice wrote an article 4 Reasons Sourcing from China will be More Expensive in 2008 with one of the main reasons for price increases listed as the change in VAT rebates. Today while reading the Spend Matters blog post Keeping Track of China’s Export Tax Rates and Rebates, we were reminded of the importance of understanding what the VAT rebates are and how to use this knowledge to bargain more effectively.

As Spend Matters points out:

One of the secrets to unlocking the total cost savings secrets of global sourcing is to understand where the profit margin from suppliers is coming from (hint: in China, historically it’s often come from a VAT rebate that is theoretically payable after to the trading or export company after goods hit the water).

So as a recap for our readers: What is the China VAT tax and why do you need to know about it?

When a factory purchases raw materials, either domestically or internationally, they pay a VAT tax. For those not familiar with the term, it’s basically a sales tax. However, if the materials are used to make a final good FOR EXPORT, then the Chinese government will issue a rebate of this tax. This rebate can be as high as 25+% on some items, so this is not insignificant.

Therefore, when a factory comes to you and wants to raise the cost of a product or you are beginning a new negotiation, one of the most common reasons the factory will give for higher costs is because of the decreased VAT rebate.

So… if you can prepare yourself with the correct information on what products have changes to the VAT rebate, and in general what your product’s VAT rebate is, you are that more empowered during the negotiation process.

Our friends over at MFG.com have put together a very solid PDF, which translates all the VAT rebates into English.

April 1, 2008 | Filed Under Sourcing | 4 Comments

The 4 Types of Factories in China

David Dayton over at Silk Road International has an excellent article detailing what he terms the “Three and a Half Kinds of Factories“. For someone new to China or a company looking to break down their search for factories into segments, this article gives some insight into the nature of the factories based on the types of customers they currently service.

Understanding what type of customers your factory currently services can help understand what types of issues you may face in working with them. It will also help you to overcome issues as they arise because you will know why the issues may be occurring. Also, in general it will let you compare prices among factories and see why one factory might be more expensive (or less) for what on the surface may appear to be the same product.

The 4 different types of factories are: ‘Purely Domestic’, ‘Mostly Domestic, Partly International’, ‘Purely International’ and ‘Limited International’.

David does a great job of breaking them down. For more details, have a look at the original post: Three and a Half Kinds of Factories.

March 31, 2008 | Filed Under China Business | 2 Comments

The Holy Grail of Risk Taking Entrepreneurs: Brits Get Rich in China Part 3 of 3

As we conclude our series with this 3rd installation, for those new to the risk taking posts please see part one of the “Brits Get Rich in China” documentary series to get some background on the players and their individual goals and challenges and then go to part two since each of these videos are a must see. Sit back and relax as we get into the final episodes of this fascinating documentary with some dynamic risk takers.

Fascinating food, to say the least, is the menu item of the day for Vance and he is not going to have any of it. As we walk with Peter and his new business partner Sessel and then get into the back seat of their car, we are told of the potential for millions in profits that Peter’s product could reap in China.

However, we are also posed with the reality that is China today in terms of Intellectual Property protection and ownership as the commentator so quickly identifies the potential for Peter’s new partner to copy Peter’s product and take the profits himself. Many of you could probably relate to the commentator asking Peter questions about “did you check him out” and of Peter’s answers when so much is at risk.

Working late with Tony as we learn another lesson of doing business - that of focus. That is what Tony does and relentless he must be to get his business up and running. As he interviews potential employees, you may understand the magnitude of his challenges and opportunities in finding the right people to help him build his business.

Back to Vance and his “Olympic Inspection Committee” bus - make sure to listen to why he takes the risk to “counterfeit” his authority. It is fascinating to say the least.

Back to Vance and the village he literally employs. He made it safe with his “Olympic Inspection Committee” bus. When you talk about going to the “source”, Vance and his village represents the essence.

Jump into the car with Tony and off we are to his new shining factory with a welcome like no other! Can you say “WOW” and we can tell you something from our experiences in China that stuff gets done - period. Not to go into the much publicized issues of quality or with ingredients as in the Heparin Scandal, we can tell you that if the Chinese are focused on something they want, it will get done and almost nothing will stop it. It is this determination and resulting execution which has made the “Made in China” a mighty force in the realms of business all over the world.

Sitting in the KTV Club with Peter’s business partner, Sessel, we watch how business unfolds and many find this far different than Western countries, but is it really? Sessel gets down to business with a very connected business man and secures a commitment over drinks and entertainment China style. Change the language and this may be the same in South Korea to Japan if not in the clubs of Vegas or the private rooms in Europe. Business gets done and another day passes.

Now with Vance we realize yet again that business just gets done as his factory close to the borders of North Korea is humming along and bringing in the money. One important citing not to miss here is Vance’s new showroom. Vance, and many others, realize that China is just not the source but also the destination for his business and he realizes that Chinese consumers have both the money and interest to buy buy buy!

Getting paid - that is the question as the commentator so rightly notes and for the now optimistic Peter, that will be his next challenge and opportunity. Finally, as we walk in the streets of New York with Tony and then get a $3 million dollar order in a party where even the attendees are fascinated by China, we get to ponder the series once again and find that in these three men that risk taking is what they did and what they continue to do.

As we wrap up this series, let’s not forget these are real men with real lives. Many have made fortunes in China and many more have lost everything. Search on stories all over the internet and/or published books on China and you will find this to be true. The opportunities are everywhere and they are nowhere, but for those who are willing and those that have a taste for adventure, China just may be the right place to pursue your “Holy Grail”.

Don’t forget to share your stories and may fortune find you!

March 25, 2008 | Filed Under China Business | 1 Comment

Share Your Expertise: David Anderson on the China Granite Industry

In a follow up to Dylan Blankenship’s article Let’s Talk Granite - Pre-fabricated Granite Import Guide, we attempt here to help readers better understand the structure and makeup of China’s granite industry. We explain where China’s main granite suppliers are located, the types of granite found in these locations, and give a brief introduction to the uniform numbering system used in the country.

Whether you are looking to purchase high quality, finished granite countertops (slabs or prefabricated), granite tile, dimension stone or granite sinks, they can all be found in China at competitive prices. According to the General Administration of Customs, China exported over 1 million tons of granite in the first 10 months of 2007 at a value of approximately $157 million US dollars. It is estimated that Chinese granite accounts for around 17-20% of the world’s granite production.

The main production centers are located in the provinces of Fujian, Guangdong and Shandong. These three provinces account for 85% of China’s stone production. Smaller production centers can be found inland in Sichuan, Shanxi, Anhui, Hebei, Guangxi, Inner Mongolia and Xinjiang. Have a look at the map below for a more visual look at China’s granite production areas.

With over 80 varieties of granite, Fujian is China’s largest granite producing province. It employs 15,000 manufacturers and is home to over 5,000 granite quarries and as many importers and exporters. Shuitou is the largest production base in the province with over 3,000 manufacturing facilities operating, including the majority of Chinas top granite suppliers.

Guangdong is a large province in the south east of China. It has more than 700 granite quarries scattered throughout the province in the cities of Lianling, Xinyi, Chaoyang, Jieyang, Gaozhou, Yangjiang, Taishan, Huizhou, Zengcheng and on the outskirts of Shenzhen. There are around 4,000 manufacturers mining some 30 varieties of granite.

In Shandong, the cities of Rong Cheng, Laizhou and Linyi are responsible for the majority of the 40+ varities of granite found in the region. Shandong’s most famous granites are Jinan Green which is very dark and also called Jinan black G3701, Isle Red, also called Peninsula red G3786, General Hung, also called Piyi General red G3752, Liu Ports Red, also called Laizhou oriental cherry red G3767 and China ash, or Laoshan grey G3706.

Have a look at the table below for a clear overview of the types of granite found in China, by province:

Types of Granite Located in China

Granite found in Fujian	Granite found in Shandong	Granite found in Guangdong
Jinjiang Bacuo white G3503	Laizhou sesame white G3765	Puning big white flower G4439
Quanzhou white G3506	Wendeng white G3760	Guangning east white sesame G4422
Haicang white G3523	Pingdu white G3755	Guangning rosy spots G4421
Xiaocuo white G3516	Zhaoyuan pearl G3783	Xinyi thin twists G4419
Hongtang white G3514	Mengyin pink G3778	Xinyi black stars and clouds G4416
Nanan snow plum G3508	Shanyuan flower G3757	Xinyi spindrift G4418
Jinjiang white in black G3516	Mengyin spindrift G3777	Guangning dark blue stars G4420
Luoyuan oriental cherry red G3563	Laizhou oriental cherry red G3767	Xinyi black G4417
Zhangpu red G3548	Piyi General red G3752
Anxi red G3535	Zeshan red G3764
Wuyi red G3528	Rongcheng Jingrun red G3784
Nanping Minjiang red G3559	Laoshan grey G3706
Nanping black G3539	Jinan black G3701
Pucheng Baizhang black G3577	Wulian leopard-skin G3742
Fuding black G3518	Rushan black G3770
Dayang black (A) G3538	Mengshan flower G3776
Shaowu green G3599	Pingyi peacock green G3791

In order to help buyers and sellers more accurately identify and trade different types of granite and other stone, in 1998 the China State Administration of the Building Materials Industry devised a uniform numbering. The system gives each variety of stone a letter and 4-digit number. For example, Fuding Black is denoted as G3518. The letter represents the type of stone, G for granite, M for marble, etc. the 4-digit number consists of 3 parts. The first 2 numbers specify the province or municipality the stone originated from, for example, Fujian is 35, Guangdong is 44 and Shandong is 37. The 3rd digit relates to the colour, characteristics and patterns on the stone and the final digit associates the stone with the specific quarry from which it originated.

Here is an extensive list of Chinese granites and marbles and conversions for the updated and original numbers. When dealing with Chinese granite suppliers, be sure to use this numbering system in all documentation and correspondence. it will save trouble down the road and can help ensure you get what you ordered.

Granite and Natural Stone Tradeshows in China

If you’re interested in starting or expanding your granite or other natural stone business, here are some of the largest trade shows for you to attend:

STONETECH SHANGHAI
Date: April 8-11, 2008 (every two years)
Location: Shanghai New International Expo Centre
Description: This exhibition takes place every two years and includes exhibitors from international stone processing, machinery and equipment and stone products.

CHINA STONE
Date: October 21-23, 2008
Location: Yunfu International Stone Materials Centre, China
Description: This fair is promoted as an international stone materials science and technology fair.

XIAMEN STONE FAIR 2008
Date: March 6-9, 2009
Location: Xiamen International Conference & Exhibition Center, Xiamen, China
Description: A fair exhibiting stone and stone machinery

ABOUT THE CONTRIBUTOR

David Anderson is Managing Director of GMC Group Ltd, a China-based
business services firm specializing in business and market development
programs for international companies seeking new or revitalized growth
in global markets.

March 22, 2008 | Filed Under Sourcing | 8 Comments

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.

Dylan Blankenship signature
dylan@sourcejuice.com // Dylan Blankenship

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

The Holy Grail of Risk Taking Entrepreneurs: Brits Get Rich in China Part 2 of 3

Risk taking continues in part two of this three part posting of the “Brits Get Rich in China” documentary series. If you haven’t yet seen our first posting on Brits Get Rich in China, Part 1 of 3 be sure to have a look before continuing on to part 2. Part 1 introduces you to the players and their individual goals and challenges.

We start off by getting to go with Peter Williams as he pitches his product to several parties in Hong Kong as a one man company. He is not successful but keeps to his belief and notes that “one has one’s setbacks but it’s like anyone in business will tell you..you either go on and overcome them or you give up…some of us weren’t made to give up.”

Back to Tony Caldera who stakes a large investment at a Shanghai trade fair to secure major orders. He brings his portfolio of cushions with an abundance of new designs. Concerned about people stealing / copying his products, he mentions the camera phone strategy used by competitors taking pictures of his products at the fair. Since it is so easy to copy (he shows how pictures are being taken by camera phones) it is difficult to protect new designs. Gets a big order at a trade fair and stress is the least of his problems now that he has an order and getting the factory up is now mandatory.

The skyline of Shanghai and back with Vance Miller as he takes us on a trip to the borders of China and North Korea as he describes how he is able to take advantage of the changing face of England’s decline and China’s rise in manufacturing capabilities and resources. How you might question? “Snapping up the carcasses” of English businesses laid to waste by China’s dominance in manufacturing is what Vance does as he buys multi-million dollar machinery in England for literally pennies on the dollar from bankrupt factories and ships them back to his factories in China.

As we have a drink with Peter in a suburb of Shanghai, we are told of his new business partner who has a track record of having access to power and more importantly relationships. As this new business partner, named Sessel Pih, talks of China as the “Wild Wild West” and how it’s life and death, he explains and this is a pivotal piece for those not acquainted with both the opportunity and the potential for absolute loss in China. A fascinating and very insightful strategy session is revealed in the exchange between Peter and Sessel – a must for all our readers even if you don’t plan on doing business in China for you are given an education that is very elemental about doing business in China but that is lost so quickly, if not overlooked. While you’re viewing this video, definitely replay Sessel’s explanation of the Four “C’s” that are “must haves” in China to be successful along with how to close the deal which will shed some humorous light on the realities of China today and those of America in the past.

Sessel’s Four “C’s” are”

Connections
Clout
Cash
Culture

Back to Vance and the intro of his son as well as something we at SourceJuice hold to be true – China is a capitalist country like no other. China is hungry, China is dynamic, and China is fast. As Vance describes “move over China is coming through big time”. Vance takes us on a ride to visit a supplier and what you may gleam off this visit is some fascinating dynamics of how “control” is both a necessity in managing your money as well as managing your supplier. Don’t forget to look at the “pen”.

March 15, 2008 | Filed Under China Business | 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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March 11, 2008 | Filed Under Currency & Finance | 1 Comment

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