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What Is Import Finance?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 September 2016
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Import finance is a term used to describe various strategies that are employed to make international trade easier for both importers and exporters. The basic idea is to provide assistance in arranging methods to pay for goods and services ordered from an international location, with neither the importer nor the exporter taking on an unacceptable degree of risk. For the importer or buyer, these mechanisms help to prevent tying up cash flow until the goods are received. At the same time, a competent import finance strategy also helps exporters receive what they need to fill the orders and manage the shipping and delivery without placing undue demand on their resources.

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With the process of financing imports, there is always the need to make sure the seller is paid in a timely manner and that the buyer receives the right goods in a mutually agreeable period of time. Rather than simply using electronic funds transfers to pre-pay for the order, or the seller billing the buyer for payment at a later date, the basics of import finance allow the financial institutions representing the two parties to create a strategy that protects both importer and exporter. This often includes the use of some sort of letter of credit issued by the buyer's bank and presented to the seller’s bank as proof that the order will be paid. The seller’s bank in turn may arrange a loan of some type to the seller, making it possible to use the proceeds from the sale to manufacture the ordered goods and arrange for the shipment and delivery. Upon receipt of the goods, the buyer’s bank honors the letter of credit, remits the funds to the seller’s bank, and the transaction is considered complete.

There are several advantages to this type of import finance arrangement. Buyers do not have to be concerned about paying for orders that never show up, since the payment is not finalized until the goods are in hand. Sellers avoid having to commit existing resources to filling the order, since the money advanced from the receiving bank can be used to cover all relevant expenses. The two banks involved benefit from the fees and any interest that is assessed to create and issue the documents involved, which in turn allows those entities to earn something from the transaction.

While import finance can sometimes be complicated based on import and export regulations that apply to the two countries involved and the exact way that the buyer and seller choose to structure the terms of the purchase, many strategies of this type are simple in nature and can be established in very little time. Other methods of arranging payment may also be employed, such as placing funds in an account and restricting their use until after a certain date, the issuance of a promissory note, and several other approaches. While those methods may be workable in some cases, the use of a letter of credit is often the preferred method, since it does minimize risk for everyone concerned.

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