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What Is Import Finance? Definition And Its Types
by Alex Pardin Financial ConsultantWhat Is Import Finance?
Before understanding what import finance is, we must understand what is an import. Imports are the goods and services that take place into a foreign country for resale while import finance is the capital which is used as specialized trade finance solutions to finance the purchase of goods which are being exported from one foreign country into another country to be imported.
In simple words, import finance is the funding of the gap between receiving the goods and sending the payments. It is the process of financing a global business by the bank or financial institution so that the respective goods or services can be brought in their own country by the importer. It is usually treated as a short-term type of finance provided by a third party.
Import transactions can be a burden on a company's cash flow due to the involvement of logistics ie. There is a long time between the purchase and delivery of goods. Therefore, the businessmen need to cover their expenses until the products arrive and this problem is solved by import financing. Now the importers can borrow money or get cash advances by a third-party. The implementation of import finance has helped reduce the risks and amount of moving variables involved in trading overseas.
Types of Import Finance
By keeping the increasing popularity and demand for import finance services, many banks and financial institutions are today providing several kinds of financing an import. Just choose them correctly and you can avoid the frustration of import procedure by using one of these methods of import finance. Let’s have a look:
Why Should We Use Import Finance Services?
There are many reasons why a businessman wants a lender to finance his small business for their import procedures. Irrespective of the prime reason -to get access to future cash, it also helps reduce the risks involved in international transactions as well as protects both importers and exporters.
Before understanding what import finance is, we must understand what is an import. Imports are the goods and services that take place into a foreign country for resale while import finance is the capital which is used as specialized trade finance solutions to finance the purchase of goods which are being exported from one foreign country into another country to be imported.
In simple words, import finance is the funding of the gap between receiving the goods and sending the payments. It is the process of financing a global business by the bank or financial institution so that the respective goods or services can be brought in their own country by the importer. It is usually treated as a short-term type of finance provided by a third party.
Import transactions can be a burden on a company's cash flow due to the involvement of logistics ie. There is a long time between the purchase and delivery of goods. Therefore, the businessmen need to cover their expenses until the products arrive and this problem is solved by import financing. Now the importers can borrow money or get cash advances by a third-party. The implementation of import finance has helped reduce the risks and amount of moving variables involved in trading overseas.
Types of Import Finance
By keeping the increasing popularity and demand for import finance services, many banks and financial institutions are today providing several kinds of financing an import. Just choose them correctly and you can avoid the frustration of import procedure by using one of these methods of import finance. Let’s have a look:
- Asset-Backed Loans - As the name suggests, Asset-Backed facilities or Asset-Backed lending is simply a trade finance solution tool where business gets funding against their collateral ie. assets such as building, equipment or any other asset on the balance-sheet of the business. The Asset-Backed loan is secured in many ways such as - a firm’s inventories, short-term investments, and accounts receivables, etc. In simple words, it is all about selling your company’s credit accounts to a commercial finance company, bank, or other financing company. It serves as a security against the same advance to the importer and the amount depends on the total worth of the items presented.
- Purchase Order Financing - This is quite similar to selling your accounts receivables but it goes one step further. It makes it possible for the traders to access funds required to supply their chains. Just grab your invoices or purchase orders and assign or sell them to a bank or commercial finance company. It will handle the risk associated with it as well as tasks of billing and collecting. When the products are manufactured, the bank or financial institution will collect from the customers, adjust its profits, and pay you the profit. Although Purchase orders are not as cheap as bank loans, if the bank is not lending money, this is an option. You can have a better understanding of this finance tool by approaching Axios Credit Bank Ltd’s Import Finance Services.
- Letter of Credit - A Letter of Credit is the most common type of import financing which is secure, versatile and can be used to finance any import transaction. It is a financial instrument issued by a bank on behalf of the importer where a bank guarantees the on-time payment for a specified consignment as soon as the Terms & Conditions are met. When a Letter of Credit is involved in an import transaction, it requires the exporter to provide certain documents as proof that the goods are delivered as mentioned.
- Bank Guarantees - As the name suggests, in this type of import finance, a guarantee is given by the bank that certifies the creditworthiness of the buyer ie, the exporter no longer bears any payment default risk. It is one of the most popular methods of import finance as it protects both importers and exporters in international trade transactions. Here, the bank is responsible for fulfilling the financial obligations of the buyer, in case they are unable. It is slightly different from the Letter of Credit as a bank guarantee is used by the contractors involved in infrastructure projects unlike regular import and export of goods through a letter of credit.
- Invoice Factoring - Invoice financing or factoring is a method of import finance that involves the selling of the accounts receivables. It is particularly one of the most common forms of import-export financing for small businesses. Also known as debt factoring or a type of asset-backed option, it allows access to the funds to the importers where an invoice finance firm purchases invoices, and when the payment is made, it pays a discounted price or takes a fee from the transaction.
- Cash in Advance - Also known as advance payment, in this type of import finance method, the importer pays an advance payment for the items to be imported before the shipment of goods. Here, the trust is very important by the importer on the exporter that the goods will be delivered on time. However, this import finance method creates a high level of risk for the importers and it is expensive also.
- Cash Against Documents (CAD) - This is also a popular type of import finance and quite similar to the Cash-in-advance. The importer will pay to the exporter in advance before the shipment of goods but there is a slight difference. Here, the third-party like a bank will hold the shipment and title documents and will only release the goods to the importer after full payment. This helps the importers reduce the level of risk. This method is easy to implement and quite cheaper than LOCs. You can approach Axios’s Import Finance Services for availing reliable trade financial tools.
Why Should We Use Import Finance Services?
There are many reasons why a businessman wants a lender to finance his small business for their import procedures. Irrespective of the prime reason -to get access to future cash, it also helps reduce the risks involved in international transactions as well as protects both importers and exporters.
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About Alex Pardin 
Financial Consultant
5 connections, 0 recommendations, 29 honor points.Joined APSense since, June 12th, 2018, From Kuala Lumpur, Malaysia.
Created on Aug 27th 2020 01:21. Viewed 451 times.
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