Import businesses are often profitable due to the lower cost of manufacturing goods from countries such as Korea, China, and Mexico.
Getting the goods landed in Australia, marked up and sold for a profit can create particular cash flow challenges. If done correctly, importers stand to profit from lower cost to sale margins as long as supply is kept healthy.
How working capital flows in the Import Business
While it’s possible to make great money importing and reselling products, it’s often challenging to source bank financing for import businesses.
Before you start the import process, you will undoubtedly need funds to prepay manufacturers deposits to go into manufacture or packing, followed by full payment to ship the items.
Depending on your suppliers’ production timeline, can mean your money will be tied up for at least 60 to 150 days before you have products to sell.
When selling products to large corporates or big-box retailers, you won’t be receiving cash on delivery. Many such corporates pay invoices 30-90 days after receiving your products. That means another few months of waiting for your profits to hit your account.
Before you convert your money into profits, you will need to wait for up to four to five months. Expenses will include the cost of inventory, shipping, duties, time, and potentially other lost sales due to inadequate working capital.
Without significant funding, you could go into the red before even getting started.
You can avoid the frustration of cash flow shortages by using one of these three non-bank options to generate funds to pay suppliers:
- Receivables lending: Financing accounts receivable is basically selling your accounts receivable to a factoring company, bank, or other providers. Invoices are sold at a discount, usually 80-95% of the face value of your invoices. The factor gives you an advance payment, for a small fee of 0.5-3%, for the invoices you would normally have to wait on for final payment.
- Inventory Finance: Even though inventory financing can be expensive, it is a very effective way of financing when you have cash tied up in stock holdings. You use your existing inventory to raise working capital allowing you to buy the imported goods. This allows you to purchase more inventory without impacting your cash flow as long as you think you know funds will come in from sales to repay the debts. There are often three types of inventory financing you can use depending on how the funder might structure the credit line. You can use a blanket inventory security, hybrid or regular floor plan, or field warehousing.
- Purchase Order Financing: This is the opposite to factoring your accounts receivable. It goes a fair way back sometimes even before the goods have gone in to manufacture. You present your purchase orders or contracts to the finance company, which assumes the risk and the task of assessment of your supply chain, buyers and suppliers. Commonly, after the products are manufactured, the funder will make available 100% of the costs of the inventory, shipping, and duties to get goods delivered. Purchase order financing is not as cheap as bank financing. If banks can’t approve the amount of funds you required, it’s a very attractive alternative. If your profit margin is healthy enough for the goods you are importing, then purchase order financing may the right option given funding is provided based on the strength of the customer ordering the goods.
Need working capital to pay suppliers? Learn about Stak’s Inventory Finance