As you can discern from the name, import financing is primarily concerned with imports/exports from overseas. Due to the distance – and more importantly, actually, the different legal jurisdictions. Trust is an attribute that cannot be overlooked and must be standardized in some way. The all-encompassing name for this is Trade Finance, and it is intended to facilitate overseas transactions. Below is a short run-through of the different types of import financing.
Import Financing with a Bank Guarantor
To obtain this, the process is similar to that of securing a traditional loan. You have to submit the indicators of your creditworthiness to a bank. hereupon that institution will issue a guarantee of your creditworthiness (assuming you’re the buyer). With their backing, contractors have a much greater ability to extend viable bids on projects that involve infrastructure. The latter is more common than import/export of goods; the latter usually favor letters of credit.
Letters of Credit for Import Financing
This is similar to the above; letters of credit – opposed to infrastructure projects – are more favorable for the import/export of goods. Specifically, the so-called Usance Letter of credit defers payment; whereas the Standby Letter of Credit effectively “promises” payment that has not yet been made. Giving the buyer peace of mind, as this promise is backed by a robust financial institution.
Import Financing with Accounts Receivable
The third and final major type of import financing involves accounts receivable and is specifically called invoice financing. The most general example of this is a B2C (business-to-consumer) transaction: Company X sells a service/product to a consumer Y with a 3-month grace period or payment due date. To improve cash flow, Company X will retain the services of Company Z (an invoice financing company, ostensibly) to remit the bulk of the value of their invoices in short order. Then Company Z will pursue payment from the consumer Y; three months later, Company Y will remit the remaining payment – less Company Y’s expenses – to the original Company X.
The import financing option you choose depends on the specifics of your business; you may even employ a combination of the above for best results. To learn more, please feel free to reach out to Crimson Stone Capital Solutions – we’re here to help.