What is Import Finance?
Import finance is a facility that ensures businesses still have sufficient working capital to operate smoothly while they wait for the delivery of goods acquired from outside the country. Overseas trading presents its challenges since the gap between purchasing of goods, and the actual delivery can take time, thus negatively impacting a company’s cash flow. Furthermore, it has an uncertainty risk factor from added freight charges and import tariff costs. Import finance allows businesses to receive funding from third parties during this interval and is a popular facility that caters to the current boom in international trade.
Most businesses invest in imports because it offers high quality, affordable, and versatile goods that enable them to capitalize on profits within their designated markets. However, as has been said, business interactions with overseas suppliers have a few serious downsides. Chief among them is the high-volume nature of each transaction which may lead businesses to over-invest in goods. There are also long payment terms, all of which result in cash-flow problems that disrupt businesses with potential for failure.
Challenges associated with overseas trading
Most of the time, businesses are levied with upfront payment requirements before their goods can be processed for delivery to their respective countries. This is in conjunction with excessively long payment terms that also serve to put companies in a position where they have depressed working capital. It is understandable when overseas suppliers employ these tactics due to lack of trust, but sometimes companies are required to put certain parts of their business on hold while they wait up to three months for delivery of goods. Import finance thus steps in to relieve working capital problems so businesses can quickly pay suppliers to speed up the delivery process.
Why is import finance beneficial?
There are numerous types of import finance solutions, including import loans and invoice factoring. They basically function to cushion importers by providing them with an influx of working capital as they patiently negotiate for delivery of supplies purchased overseas. In addition, import finance facilities can give businesses credit protection to ensure they are not negatively impacted by bad debt from customers or problems with the delivery of goods from the supplier’s end. They also efficiently handle the paperwork and procedural requirements that are part of every trading cycle for the benefit of the business (quicker process, no unnecessary delays, etc.).
Import factoring is similar to factoring and invoice discounting and can be accessed by businesses that have a proven background and familiarity with imports. It is also necessary for the business to submit confirmed purchase orders from customers with verified credit trustworthiness. Furthermore, the overseas delivery from the supplier should have a gross profit margin of at least 20% and should contain goods that are ready to be sold once the order arrives (i.e. finished goods that can be sold without further processing, for example, timber).
How does import finance Work?
Import finance facilities are there to bridge the gap between when a trusted customer confirms an order using credit and the upfront payment required by the overseas supplier. The business can receive a maximum 100% advance to cover all import costs, which helps to streamline the payment cycle involved in overseas trade. This type of facility has manifold benefits:
- Suppliers are paid quickly to facilitate fast delivery of purchased goods.
- Early payments to suppliers help to foster trust and allow businesses to exploit discount privileges.
- The provider takes care of the burden associated with import transactions, e.g. freight, duty, and required paperwork and processes. This leaves the business free and equipped to attend to day-to-day activities and expenses during the entire trade cycle (from the point the customer places the order up until the customer pays for the received order).
- Businesses that import can experience growth by quickly meeting orders and taking on new ones.