TRADE FINANCE / IMPORT FINANCE always involves at least two parties the seller / exporter and the buyer / importer. The importer and the exporter settle their payment mechanism in various ways. The method utilized depends on the risk appetite of the exporter as to how much payment flexibility it will give to its buyer the importer starting with Open Accounts to Letters of Credit.
Import Financing is done in various ways:
- Open Account: The Exporter ships and delivers the goods to the Importer on good faith that the Importer will pay. This method is used in inter company transactions; in a buyers market, or where the Exporter and Importer have two-way settable trade flows, or where the two parties have a long standing good relationship.
- DP: Documents against Payment. The documents are released to the importer only after the Importer has been paid.
- DA: Documents against Acceptance. The documents are released to the importer after the Importer has Accepted the Draft.
- Letter of Credit. A third party bank takes over the liability of paying the Importer
Generally commercial banks get involved in trade finance. Most countries also have their dedicated facilities to support their exports in the form of Export Import Banks. The US has its own Export Import Bank (EXIM BANK) which is very active and has many different programs from short term to medium and long term facilities.
Purchase order financing often involves import financing and the above methods particularly LCs and DPs are used. The specialized Purchase Order Financing institution would use their banks to open the LC or have their banks pay the exporter or accept the draft drawn on the importer if the exporter has shipped the goods on time and on specifications.
The importer has to consider various regulatory issues while importing: duties, tariffs, quotas, hazardous materials, FDA requirement, best mode of transportation, country of origin restrictions, etc. Also while negotiating with the supplier, the importer has to decide on what basis to purchase the goods such as FOB, CIF, DDP, etc. (Please see the Letter of Credit section).
Finding the right supplier can be key. This will ensure that the goods are delivered on time in the quality and quantity required so that the importer meets its obligations to its buyers. Having an experienced Purchase Order (PO) Financing Company working with the importer can also be critical as the PO Finance Company will not only provide the capital but also the required logistic discipline.
Please contact Ashford Finance for your import funding needs.
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