Author: Gary Hemming CeMAP CeFA CeRGI CSP
20+ years experience in business loans
The UK has long been a major global trading power and, despite its comparatively small size, it has the second largest economy in Europe. We live in a global economy where the ability to trade internationally can change the fortunes of a business.
Trading internationally has many benefits, however, often people are wary of doing business on a global scale owing to the complexities of financing arrangements and in particular having funds tied up for long periods of time, which is never an ideal situation for a thriving business.
In this article we examine the pros and cons of import finance, what it is for and whether it could help your company take the next step onto the global stage.
What is import finance?
Import finance is a short term funding solution that works in a similar way to a bridging loan – it covers the period of time between receiving goods and payment being sent.
This type of trade finance enables businesses to function without tying up cash flow and is especially useful when purchasing goods and materials from overseas suppliers; it ensures that issues such as lengthy shipping times or payment delays don’t tie up capital for long periods of time enabling you to carry on trading.
The most important aspect of import finance is that it allows companies to manage their finances effectively with bespoke arrangements.
Choosing an import finance solution lessens the risk of cross border trade, taking the worry out of issues such as waiting for goods to be received, import and export paperwork to be completed and currencies to be converted.
Import finance allows businesses to carry on trading rather than pausing activities during this waiting period.
How does import finance work?
Import finance helps facilitate international trade by removing some of the risk factors, and ensuring a smooth and transparent process.
There are many different types of important finance, we’ve listed the most common forms here. It is, however, important to note that some forms of financing are more complex than others; it is essential to work with experienced advisors to ensure advice is tailored to your particular needs and circumstances.
The most common forms of import finance are:
1. Letters of Credit (LCs): A letter of credit is issued by a bank. It is a guarantee that the buyers will pay the seller the correct amount and that this payment will be made by an agreed date.
In the event that the buyer cannot make the payment, the bank would then make the payment. This gives absolute certainty to the seller that payment will be made.
2. Trade credit insurance: This type of insurance covers the risk of non-payment when selling overseas. Taking credit insurance would mean that if a buyer defaulted on their payment then the cost of the goods would be covered by the insurance company.
Trade credit insurance lessens the risk of dealing in new and unfamiliar markets overseas.
3. Invoice financing: This is an arrangement where unpaid invoices are sold to a third party financier. The financier pays immediately for the invoices and then the debt transfers to them.
Invoice financing can help a business maintain cash flow if payments are outstanding for a long time and money is required urgently. There are different types available depending on your business needs. The main types are invoice discounting, invoice factoring (also known as debt factoring) and specialist confidential invoice discounting.
4. Supplier credit: In this arrangement, the supplier extends credit to the buyer, allowing them to pay for the goods at a later date. This is often used in combination with other forms of import finance.
Who can use import finance?
A wide range of organisations use import finance from small and medium sized enterprises (SMEs) to large corporations. SMEs represent over 99 per cent of businesses throughout the European Union and so it is an important tool that supports international trade.
Import finance is also used by international charities and government agencies when supplies are needed urgently; for example, when providing goods in the aftermath of an emergency incident.
Much like other types of trade finance, such as supply chain finance and export finance, any company that trades overseas can consider export financing.
What are the pros and cons of import finance?
As with any financial arrangement it is imperative to weigh up the advantages and disadvantages of using import finance before you enter into an agreement. Import finance can be greatly beneficial to a business, however, it can also be complex and requires an expert financial advisor with specific experience in this area.
- Overseas trade – Using this form of finance will free up your business cash flow and allow you to profit from overseas trading.
- Improved working capital – By improving your working capital, you’ll be able to increase your levels of trade.
- Increased profit – Increased trade and the ability to fund your imports will offer your company the opportunity to increase profits.
Disadvantages
- Costs – As with any type of finance, there is a cost to consider. The charges for facilitating finance need to be weighed against the overall benefit of using this type of financial product.
- Complexity – the complexity of transactions and the likelihood that there will be risks to hedge against such as currency fluctuations.
- Non-payment – There is a possibility that your buyer will not pay or payment will be delayed. This is a factor to be considered in relation to the type of financial product you select and how you wish to mitigate that risk.
What other products can I use to finance my business?
Import finance isn’t always the best option for companies in need of working capital finance.
The main product types are business loans, asset based lending (ABL), asset finance and business revolving credit facilities such as standalone facilities, overdrafts and business credit cards.
Business loans can come in the form of unsecured business loans, secured business loans and specialist quick business loans – for when you need funds in a hurry.
Asset based lending generally covers invoice finance and accounts receivable factoring.
Full details of each product is beyond the scope of this article, but our team of experienced commercial finance experts are happy to talk through your options. Get in touch to find out more.
Frequently Asked Questions
How quickly can I get funding?
The funding process usually takes two to three weeks on average, depending on your circumstances.
We will support you through the process and have many years of experience working with a range of specialist brokers throughout the country to find the right match for our clients.
Can you help if I have bad credit?
Yes, poor credit isn’t necessarily a barrier to obtaining import finance, the ability to get funding very much depends on your industry and the other parties involved in your transactions.
We will work with your business to understand your needs and how best we can support you to achieve a manageable finance solution.
Do you work with multiple funders?
Yes, we can structure transactions with one or multiple providers to give you the funds you need.
There is never a ‘one size fits all’ solution and so make sure to work with finance specialists who seek to thoroughly understand your business and your needs.
If you are considering import finance then speak to one of our specialists for a free callback and introductory discussion.
