What is import finance?
What type of goods can import finance be used for?
How does import finance work?
Imported goods may be bought on letters of credit or open terms. Much trade is done on trust between the buyer and seller; however as trade and companies expand and there is a lack of trust between jurisdictions and new buyers or sellers – trade instruments are used more frequently. Letters of credit are used as a type of import finance to bring in more goods to a country, with the ability to trade with a foreign entity that is not trusted. Import finance is an integral part of any growing company and this can be structured in a number of ways.
How does export finance differ?
Export finance conversely works on the basis that goods are financed and usually exported cross border. This can use trade finance lines including letters of credit or other alternative financing structures. Many funders will only release capital when title has passed and certain documents are delivered. This will include whether shipment has happened and the goods have been loaded. Read our export finance guide here.
Why use import finance?
There are many reasons to use a lender to finance imports. Outside of the high cash demands; this will also create certainty and security around trades. Understanding the cash cycle and knowing how fast a product turns along with the margins and transport mechanism is of utmost importance. In the event that the right import finance and ABL structure can be put in place, then the trade cycle of a business can be separately migrated away from the working capital requirements of a company and work standalone; to a large degree.
Types of import finance include:
- Trade Finance
- Usance and Standby Letters of Credit (LCs)
- Bank confirmations and guarantees
- Invoice finance
- Cash against documents
- Bonds and bank guarantees
- Asset backed facilities
Import finance: What are the requirements?
Import finance is looked at and reviewed on a case by case basis. Generally, a financier would ask for the following in an application:
- Audited financial statements
- Full business plans
- Financial cashflow forecasts
- Creditor reports
- Details and references of the company directors
- Information on company liabilities
Benefits of import financing
Import finance are off-balance sheet financial instruments, which means they may not affect existing bank facilities or bank relationships. The benefits of import finance mean that importers can grow without taking on equity or angel investment, losing share of the business.