Continuing with our educational series on Trade Finance, in this article we look at Import and Export Finance and how it works in international trade.
Moving raw materials, incomplete goods and finished products between trade jurisdictions can be fraught with regulatory complexity, financial risk and business uncertainty.
As a result, many firms refrain from engaging in importing or exporting. However, these activities can also be extremely lucrative; importing can grow revenues and reduce costs, whilst exporting increases firms’ customer base, and therefore their profits.
This leaves many firms in the awkward position of knowing there are profitable international transactions out there for them to conduct, but being unable to free up the capital from their businesses’ existing accounts receivable to invest in them without taking great risks with their companies’ assets and cash flow.
Trade financiers have the tools and the expertise to manage both these issues and help both importers and exporters invest in profitable international ventures.
Importing is the act of purchasing international goods and transporting them across trade jurisdictions – most commonly, a national border.
Importing is subject to a plethora of rules and regulations by the country of the buyer; in many countries, importers require licences to import certain goods or to engage in importing at all, and a myriad of quotas, tariffs, duties and regulations govern their activities.
Nevertheless, importing raw materials or finished goods can be extremely lucrative for businesses looking to provide new products to their customers, take advantage of exchange rates, reduce production costs, or guarantee goods for their supply chains.
Import finance allows firms to buy finished or incomplete goods from international suppliers on credit from a lender using trade finance tools. It is usually secured against invoices the buyer is due payment for, or even the imported goods themselves.
Once the loan and repayment terms have been agreed, the lender will approve payment to the supplier immediately using a letter of credit. This makes payment conditional on provision of documentation proving the goods receivable have been shipped, such as a bill of lading.
For longer transactions involving multiple processing and transportation stages, more complicated arrangements such as performance bonds or bank payment guarantees can be used.
These create a performance-based payment structure, ensuring the buyer only pays for goods of sufficient quality delivered on time.
There are three good reasons to use a trade financier to support an import transaction.
1) Trade financiers lend on long repayment terms with minimal capital securities. This means trade finance can be used to bridge the gap between the receipt of funds through sales of an import and the requirement to pay suppliers before goods are dispatched. In turn, this improves cash flow, as firms do not have to wait for imported goods to be transported, received and sold before paying suppliers.
2) Trade finance can help buyers negotiate early settlement discounts or better deals with suppliers, who know they will be paid on dispatch.
3) As a trusted middleman between importer and supplier, trade financiers reduce the risk that suppliers will compromise their obligations, and can take arrangements to shield importers from financial risks, such as exchange rate fluctuations.
Conversely, export finance supports suppliers looking to sell goods to buyers in international trade jurisdictions.
The financial benefits of exporting to a firm are clear; exporting a product to an international market means more customers for that product, more sales from those customers, and more profit from those sales.
There are several different types and structures of export finance depending on the business seeking finance and the nature of the export transaction. If the buyer is also using trade finance tools, then exporters can arrange to be provided with a letter of credit from the buyer’s financier, which will arrange for release of goods and payment on the basis of conditions specified in their contract.
However, if the buyer is offering conventional repayment terms (usually, within a time period after the goods are received by the importer), exporters can face lengthy trade cycles and a great deal of financial uncertainty. Here, receivables or invoice finance can be used to advance payment to exporters by a trade financier to ease cash flow pressures.
Trade finance offers two clear benefits to exporters. First, firms can capitalise on lucrative opportunities to sell their goods to new customers and new markets whilst maintaining their businesses’ regular order cycle and cash flow.
This means firms can invest in their business and grow revenues, margins and profits without withdrawing capital from their business or sacrificing control of it through equity sales. Second, the major issue preventing firms from initiating or expanding exporting activities is simple distrust or lack of understanding in relation to international buyers.
Trade financiers can offer security and assurance to exporters that they will be paid for the goods they dispatch and that any disputes can be resolved effectively by a financial middleman.
Trade financiers provide credit facilities that are tailored to the needs of exporters and importers regardless of their trade jurisdiction.
Through access to a wide network of private finance sources, including individual investors, trading firms and crowd sourced funding, independent trade finance houses are best placed to provide the collateral, bespoke repayment terms, and flexible service that every industry requires to grow their imports or exports effectively.