Import finance

Import finance makes international trade easier, more profitable and less risky.

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What is import finance?

Import finance refers to a range of funding solutions, that make it easier for companies to purchase goods and services — from foreign suppliers.

Some import financing products aim to bridge the funding gaps between — buying goods overseas and receiving them in another country. Other import finance solutions, are mainly concerned with reducing the risks trading internationally brings.

Like export finance — import finance is a form of trade finance.

Import finance — considerations

There are numerous benefits to importing, such as lower prices, better quality goods and gaining competitive advantage. However, these benefits do not come without challenges.

Both importation and exportation can involve complex transactions. These complexities arise due to the actual logistics of moving products from one country to another. Shipping takes time. As a result, companies can experience delays between purchasing goods and delivery.

This delay or gap, can bring about a significant cash flow problem. Businesses still need to operate and cover expenses — while waiting for goods to arrive. Import financing aims to solve this problem, by enabling importers to borrow money — while waiting for product delivery.

Businesses also consider import finance, when they want to reduce the risks of international trade. For example, a business making payment — but never receiving the goods. Conversely, the exporter faces a similar risk of shipping goods — but not getting paid either on time or at all.

Import finance addresses both these issues, through issuing things like letters of credit (LC) — where a bank guarantees payment, as soon as goods are shipped.

Other international trading risks include currency, interest rate, transportation and political risks. Financial products that lessen these risks include guarantees, bonds, sureties and credit insurance.

The growth and extensive use of import finance, has helped shape and develop world trade — as we know it today. Without import finance, the level of risk and moving variables involved in doing business abroad — would hinder international trade as a whole.

How does import finance work?

Import finance is flexible and can be tailored to your specific needs. A number of different financial products may be appropriate, when it comes to importing.

Banks or trade finance houses, may need you to produce a purchase order (from your end-customer) or a robust sales forecast — for any goods you wish to import. In most cases, you will also need to provide details of your business, its trading history and statement of accounts.

The information provided will be used to assess your credit risk, and allow a bank to draft potential financing terms (interest rates, fees, charges, term-length etc.).

If you are successful in your application, the bank can then produce a letter of credit. Essentially, this letter of credit promises to pay an exporter — as soon as your order has been shipped. At this stage, you may also be offered various insurance products or foreign exchange services — aimed at ensuring delivery and protecting your money.

Once your goods have been produced and shipped — your supplier (the exporter) will be paid by your bank. There are a number of ways of making repayment — with invoice financing being a popular option. When used in conjunction with an import finance facility — it enables you to obtain funding from start to finish i.e. from importing, to selling to the end-customer.

Types of import finance

A bill of exchange is a written agreement, where an importer is required to pay an exporter — on a future predetermined date. Accordingly, an importer can receive goods straightaway, but defer payment.

A letter issued by an importer’s bank, to the exporter’s bank — serving as a guarantee of payment being made for goods delivered.

A line of credit is a pre-set amount of money — that a bank has agreed to lend you. You are then able to draw from the line of credit, as and when needed, up to the credit limit.

Invoice financing allows you to leverage your accounts receivable — to get funds in advance of when you are actually due to be paid.

With inventory or stock financing, lenders can purchase (import) stock from a seller — on your behalf. The imported stock then serves as security for the loan.

Import loan

An import loan is a short-term cash advance, that enables importers to bring in goods from overseas. The loan may be secured or unsecured. The loan-term is sufficient enough for importers to manufacture goods, or sell directly to end-buyers.

Import finance benefits

  • Improved sales negotiation — as you can pay the exporter immediately
  • Helps manage cash flow
  • Gain access to cheaper or higher quality foreign goods
  • Mitigates the risks of international trade

Import finance limitations

  • Complicated — hard to understand and pick the right finance product
  • Startup companies are often not eligible for tailored import solutions
  • Can be expensive — need to be fully aware of costs in order to be profitable
  • Strict contractual obligations that must be met

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