Importing goods and services can be extremely worthwhile for businesses that are looking to provide new products to their customers, while taking advantage of exchange rates, reduced production costs.
Import finance allows firms to buy commodities from global suppliers on credit from a lender by using trade finance tools. It is usually secured against various documentations within the process flow such as invoices, bill of lading,letter of credit and other specific ones.
As soon as the loan and repayment terms are agreed, the lender approves payment to the supplier immediately using one of the trade finance tools. This makes payment conditional on providing documents that proves the goods receivable have been shipped, such as a bill of lading.
For longer and more cumbersome transactions which involve multiple processing and transportation stages then other relevant tools such as performance bonds or bank payment guarantees must be used. These create performance and delivery- based payment structure, ensuring the buyer only pays for the amount of goods and quality delivered on time.
Types of import finance
There exists a variety of import trade finance depending upon the business needs. Majorly these can be classified in:
Each of them has their own importance as well as terms and conditions depending upon the importer’s requirements.
Usance/Standby letter of credit
When a Usance Letter of Credit is applied within the transaction, it allows payment from the importer to be deferred. This gives an importer more time for inspecting goods. In the case of re-export, importers get sufficient time to sell the goods. When a Standby Letter of Credit is applied along with the transaction, it allows the exporter of the products the satisfaction about the payment as it is a type of guarantee for the due payment and is usually issued by a bank.
Bank Guarantees can be considered as a guarantee from a bank which certifies the creditworthiness of an importer. This is done by offering to fulfil all the financial obligations of the importer, in the scenario if they cannot. The only difference between a Bank Guarantee and a Letter of Credit is the way as per which they are used. Traders who are involved in the regular import export business more likely use Letters of credit.
Invoice finance is a method of import trade finance which involves selling or shifting of liabilities of their accounts receivables. For instance a company supplies their goods to Consumer X. They grant 90-day payment terms over the transaction, however by invoice financing it allows access to these funds earlier. A third party generally an Invoice Finance institution purchase or commit for the invoices, and take fee from the transaction.
Asset-Backed Facilities is a type of financial tool for a business securing a loan against their collateral or assets. The asset-based loan can be secured with one of the following:
- Accounts Receivables
- Buildings/ any other assets on the balance sheet of the business
After knowing about import finance let’s go through the benefits because of which import finance should be taken. There exists a number of reasons because of which you should use import finance for growing your business. Take a look at these most crucial benefits that you and your business could attain if you take advantage of this provision i.e. import finance.
- Improve negotiation capacity
It is known to be much easier to negotiate about convenient terms of trade when trade finance constraints are not a factor that has to be taken into consideration. A trader gets relevant and needed bargaining position when they already have the needed finance for a particular transaction.
- Prevent cash flow problems
Significantly large cash reserves are required in international trade. The buyer will obviously need to purchase in bulk in terms to move volumes fast by making some amount of profits per product. This will be impossible to do if cash limitations are an issue. But with the access to import finance, buyer will be able to have a steady cash flow and can carry out his business activities without much hassle.
- Increase gross profits
Both importers and exporters who have access to import export finance are strategically placed to transact smoothly. The buying capability of buyers is raised and they therefore will have access to the products that they need, to carry out business. When cash flow is not limited, purchases can be done any time when the prices for specific goods drop and then can sell them when the prices are high. This places the buyers at an advantage by making it possible for them to enjoy high profits consistently.
- Provide convenient repayment terms
The import export bank offers finance provisions which provide extended repayment periods between 30 and 90 days. Depending on some specific circumstances and needs, you might be able to choose an option which will allow you to have sufficient time to get the cash in hand and to return it back to the financier. This means that as soon as you will receive your consignment, you will try to move the goods as fast as possible. So that by the time the repayment period comes closer, you will have already recovered the necessary amount to repay the loan being financed.
- Risk mitigation
International trade is full of challenges that are not common to other existing forms of business. These challenges include fluctuations in currency, political instability, and the risk associated with foreign buyer’s credit worthiness. With the consideration of import finance, these risks are irrelevant as the payment is either guaranteed or will be made immediately by the finance institutions.
- Makes a trader competitive
A trader who is having access to financing options is in a prime position for offering suitable terms of trade to interested business persons. He will be able to offer friendly prices for the buyers of local markets and will match any competitor offering an equal or lower price than his.