If you are an importer dealing in international trade transactions, you might need import finance. But what import finance is and which import finance solution is beneficial for an organization. In this article, we are explaining everything you need to know about import finance. Take a look.
What is Import Finance?
Import finance can be simply defined as a specialized trade finance solution that has been assigned by a bank or a financial institution to an importer to fund their purchase from abroad. In other words, it includes financial transactions to fund the gap between purchasing the goods and sending the payment.
Most of the time, there is a long time gap between the purchase and the delivery of products that often results in cash flow deficiency for the traders, especially for SMEs. Here, getting Import Trade finance Service from a renowned institution can help traders overcome their cash crunch. But which import finance should we choose? Here are its types:
Types of Import Finance
As the popularity and demand for import finance are increasing among traders dealing in international trade, especially amid the Covid-19 pandemic, various banks and FIs are offering multiple types of import finance instruments. Some of them are here as follows:
- Usance/ Standby Letters of Credit - Usance/Standby letter of credit is one of the frequently used import trade finance instruments. When an SBLC is applied in a transaction, it allows the importer to defer the payment against the purchase. Thereby, the importer is capable of managing the required funds. On the other hand, when a bank or FI issues a Letter of Credit, it guarantees an on-time payment to the exporter only if the buyer defaults and the seller submits the proof of the same. It reduces the risk of default.
- Bank Guarantee - Bank Guarantee ie. BG is another popular form of import finance service where a bank guarantees a full-fledged & on-time payment to the exporter. If the buyer is unable to make the payment or defaults on the terms & conditions of the contract, the bank will make the payment to the exporter. It acts as proof of the importer's creditworthiness to the exporter as it protects exporters from any type of financial loss.
- Asset-Backed Facilities - Also known as Asset-based lending, it is a type of import finance tool where businesses can secure loans against their collateral. For example, inventory, equipment, buildings, account receivables, or any other asset mentioned in the balance sheet.
- Invoice Financing - Another type of import trade finance allows importers to raise the funds by selling their account receivables. There are various banks or FIs that buy these ARs in exchange for 50-80% of invoice value as a loan. This way, the traders can manage their urgent requirements efficiently. Additionally, it also helps in improving cash flow and enhancing working capital.
Now you know what import finance is, its types and how it helps global traders in coping with financial losses. It helps importers to defer the payment and maintain their working capital as well as exporters can avoid the risk of payment overseas.