Connect2India helps overseas businesses to easy and flexible finance for Import from diverse countries. We have years of experience and large networks in the global market.
What is Import Finance
Import finance helps importers in overcoming the challenges associated with trading which affect the importer's cash flow. With the support of import finance, importer can be free to continue invest into his business growth while involving in an international trade. It decreases the pressure on cash flow of importer. Also it takes care of complex paperwork.
Today, international trade is growing very fast and so are the financial services which are related to it. Data shows that over 220 countries are active currently in trade. To support the expansion of world trade, financial services are also improving and being more effective. Many times major banks are considered the primary sources of such services but picture is changed now. But also a separate of market of trade finance companies has been developed in last few years. Now you can chose the appropriate financing from so many options, for your trade as per your financial circumstances.
Import of foreign products is beneficial in many views, that is why governments keep their trade policies liberal. Structure of global economy is changing continuously. The economies of many countries have been improved. Also imported products increased the range of choices to the consumers of that country and the competition between domestic and foreign products keep the prices down.
There is various trade terms helpful in balancing the transactions risk. For an importer, right quality of products, right quantity and on time delivery is important. Importer always negotiates for the most favorable terms with his exporter. An importer likes his seller to negotiate the terms in order to minimize the potential risks like nonpayment, delay etc. Following are the most common terms of purchase-
Letters of Credit
Under cash-in-advance terms of purchase, importer must send the payment to exporter before the shipment. These are the most risky terms for importer and risk free for exporter. There are certain circumstances when exporter may these terms before the importer like-
Products offered by seller, are in high demand so that he has wide options and he can refuse to accommodate importer's financing request.
The importer is not well established in domestic or international market.
Economic risks are very high of importer's country.
Credit status of importer is doubtful.
These types of terms require trust between exporter and importer. Importer must be sure that exporter will deliver the right products on time. These terms contain high risks for the importer as he can't insist for the correction if documentation is improper and product quaity is not good. Also exporter may never deliver the products after receiving the payment. Although, they are also most inexpensive as no involvement of commercial bank is required under such terms.
These terms allow importer to make payment to exporter after the sales of products to end user and payment received. These terms contain the high risk for overseas exporter while most advantageous for importer.
Letter of Credit
Letter of credit is a bank letter, which is issued by bank and authorizes its customer or his company to draw drafts on the bank.It is the most effective way of financing export-import trade and has been used for the years. Thus, bank help completing the trade transaction by furnishing its credit in the place of customer's credit. However bank doesn't look for the quality and quantity of goods. It only considers documents. Importer should be sure that he's not dealing with an dishonest exporter.
The governments of different countries publish the uniform practices for documentary credits and commercial code which is mandatory for negotiation and issuance of letters of credit for specific amount of money. All conditions, beneficiary and methode should be stated in the form. Letters of credit has an exipry date on it.
There are some conditions for both exporter and importer which should be followed for the transactions.
Condition for buyer
Importer must present the necessary documents and proofs showing the accurate shipment, in order to get the money released from bank.
Condition for seller
Exporter must provide the necessary documents related to shipment through his bank in order to get paid.
Also both issuing bank for importer and advising bank working for exporter, play role of intermediaries for both parties (importer and exporter) by providing security in trade transaction.
Types of Letter of credit
There are for forms of letter of credit as follows:
Revocable L/C- This form is rarely used in these days. In this, issuing bank can cancel or amend any time so, exporter can't count on the terms until he is paid.
Irrevocable L/C- This form involves the higher commitment by bank and attractive to both exporter and importer. It can't be cancel until the both exporter and importer are agree for a change.
Confirmed L/C- Exporter can request for the confirmed L/C as per the credit risk or the country in which issuing bank is located. An advising bank which confirm the L/C becomes the responsible for the payment.
Unconfirmed L/C- There's no responsibility of payment on advising bank in such L/C. They only handle the documentation.