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Word Count: 955 Purchase Order Financing- The China Advantage
As of July, 2007, the Central Intelligence Agency for the United States
government estimated that the population of China is over one billion three
hundred twenty one million people. In contrast, the population of the United
States is estimated to be a little over three hundred two million people. That’s
1,321,000,000 versus 302,000,000 people; China has over four times the
population of the U.S.
In the past two decades China has completed and put into operation over 2000
large and medium-sized industrial projects; these include railways, atomic power
stations and completely new cities. There has been ginormous investments in
other fixed assets such as basic industries, 100,000 new reservoirs for water
storage, irrigated land, coal mining, oil-drilling, steel-making, power
generation, highway construction, and newly constructed and extended ports.
China has the world’s largest manufacturing workforce- over 100 million people.
In comparison, there are about 14 million manufacturing workers in the United
States. China’s labor costs are low compared to the United States and many other
parts of the world. As of 2002 statistics indicate that employees in China’s
city manufacturing enterprises received about $0.95 per hour; rural workers
average about half this amount: $0.41 per hour. A large majority of
manufacturing employees work outside the cities. They earn about 3% of the
average hourly compensation of factory workers in the U.S. and many other
developed countries. With low land costs and low labor costs it is no wonder
that the cost advantage to manufacturing in China is extremely attractive to
American entrepreneurs. When their products are manufactured with sufficient
quality controls, the cheaper costs and effective delivery systems create a
win-win situation for those who are able to participate.
Manufacturing is a basic Chinese industry. When you take raw materials and labor
and produce products that can be sold in high quantities at a lower cost than
U.S. competitors, and successfully import to them to the U.S. and it is possible
to have excellent returns on your investment. And China’s political and economic
system is relatively stable compared to other developing nations such as many
countries in Africa.
What is the approximate size of the trade in goods from China? According the
U.S. Census bureau, Foreign Trade Division, imports from China in 2006 were over
$287 Billion dollars; for the first five months of 2007 imports from China were
over $120 Billion dollars.
What are the main categories of products imported into the U.S. from China? This
includes iron and steel products, specialized industrial machinery, office
machines and computer, telecommunications and sound equipment, electrical
machinery and parts, road motor vehicles, building and lighting products,
furniture, travel goods and handbags, footwear, professional, scientific and
controlling instruments, photographic and optical equipment, timepieces,
personal care products, and food products such as tea. According to the American
Electronics Association, high-tech imports from China are on the rise.
What are some of the main risks associated with doing business with a
manufacturer in China? We do not speak the same language, so a good interpreter
is necessary. Our legal systems are completely different and the Chinese legal
system is complicated and weak. Therefore it is vital to develop good
relationships with the proper trading partners. It is also important to have
excellent international legal counsel to comply with the complexities of
contract law, local Chinese law and relevant U.S. law. Protecting intellectual
property is a challenge in China.
What does this all have to do with purchase order financing? International
purchase order financing is complicated and complex in details, but the concept
is simple. If you have a product that can be manufactured in China, and you have
made the proper arrangements for production and shipping but lack sufficient
capital to finance the transaction- with a large purchase order from a
creditworthy customer a commercial finance company will agree to have their bank
issue a Letter of Credit to guarantee that the Chinese factory producing the
product will be paid. When the goods are shipped and delivered to your customer
the commercial finance company pays the Chinese factory. Between 70% and 100% of
the product’s cost may be financed depending on the product’s gross margins and
the risks involved. Purchase order financing may facilitate your exponential
growth and profits for all concerned.
When your customer is invoiced for the product an account receivable is created
which will be paid to the commercial financing company. Purchase order financing
with an international letter of credit can make the deal possible. Accounts
receivable financing, or factoring, is the back end financing that guarantees
payment to all concerned. The expertise of the commercial finance company can be
invaluable with regard to helping you succeed in this challenging marketplace.
A wise man once said if you put a flea in a jar with a lid, the flea would keep
jumping into the lid time after time. After a while if you take the lid off, the
flea will only jump as high as the lid. Why limit your potential when it is just
as easy to set your expectations higher? For businesses that sell manufactured
products to other businesses, purchase order financing may be the way to reap
the benefits of the China advantage.
Copyright © 2007 Gregg Financial Services
www.greggfinancialservices.com
Mr. Elberg is a licensed attorney and licensed real estate broker. Gregg
Financial Services is a full service brokerage for commercial finance companies
and banks that fund B2B businesses. Mr. Elberg arranges funding from $25,000 to
$50 million per month at competitive pricing, and works to reduce your financing
costs as your company grows. For more information about GFS, please visit our
website:
http://www.greggfinancialservices.com
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