Factoring: Import finance: the solution to engage in international trade

Import finance is a specific receivables finance product designed for importers, enabling them to receive near-immediate payment for their outstanding international invoices. Given the complexity of international trade, many other benefits and services may be added to this basic feature. But just like export finance, import finance or import financing also represents a series of trade finance solutions, aimed at importers.

How does it work and what are the different types of financial products of this kind?

Principles of import finance

Within the receivables finance business, import financing is a factoring product helping importers cope with the funding gap.

How import finance works

Import financing works like any other factoring arrangement to get near-instant payment of overseas transactions with overseas suppliers.

- Importers in credit terms may simply sell their outstanding invoices to the financial services provider in a factoring deal;

- Or enter an invoice discounting agreement.

It also covers all other expenses related to import operations, including freight, customs duties and VAT included, for up to 100% of their total value in some cases.

Benefits

This financing facility has the obvious benefit of providing working capital nearly immediately, when international payments may take weeks, or even months to complete, and are sometimes only initiated when the goods have been received. But there’s more:

- If a factoring arrangement is chosen, import finance providers greatly ease the bureaucratic burden on importer by centralising all communications and transactions with customs and tax authorities;

- Import financing also allows greater protection against foreign exchange risk, as rates are set at the time of the deal between the importer and factor;

- Factors often work with guaranty-providing firms and government bodies to better evaluate the creditworthiness of the international client, and cover risk.

Different types of import finance

Import finance also represents a series of financial facilities used to fund several events in the import business. Here is a series of short introductions to a few financial solutions offered by banks and financial institutions to help importers engage in international trade.

Documentary credit reimbursement finance

This option allows the financial institution to finance documentary credit such as letters of credit signed by an importer and exporter.

Trade finance loans

Trade finance loans are advances in local or international currencies allowing exporters and importers to finance their trade. They must be subjected to a documented, actual transaction verified by the financial institution.

Bank guaranties

With bank guaranties, financial institutions agree to pay a specified amount to a specified third party (principal) on behalf of their clients, enabling them to enter trade or financial arrangements without having the financial securities required themselves.