If you own a Small to Medium Enterprise (SME), you may want to buy goods from China or other low-cost producing countries. Importing goods from foreign companies can result in better profits for your business.
Import financing through Letter of Credit Financing can mitigate your fears and increase your supplies.
Importing can be scary, especially if you are a new business looking to enter the trade market with a supplier whose operations are on the other side of the world.
The primary issue may be that because of your size and newness, the absence of liquidity and the lack of established credit; a foreign supplier may only offer paid in advance or COD to your company because of the perceived risk involved. However, this mistrust can work both ways, as you cannot personally know this supplier. That said, trust that the company will export your merchandise in sound quality, the right quantity, at the agreed price and on time. It is because of these trust-related issues that a factor will act as an intermediary. Import Financing is between you, the importer, and your exporter. The factoring company will facilitate the process of international trade through letters of credit.
What is a letter of credit in international trade?
In this case, a letter of credit is a legal document that creates an agreement between you, the importer, and your international exporter, regarding payment. In essence, the factor agrees to use our resources for the exporter, for the specific transaction. The letter of credit allows your company to have established credit and thus trust, in an area where your business may not have prior experience.
How does that minimize my risk in foreign trade?
An import financing agreement on payment benefits to both parties. Payment condition often includes the supplier submitting paperwork to the factor showing that your merchandise has been shipped. If for any reason, the exporter has broken any of the agreed-upon terms, you, as the importer, will not have to pay that exporter. This limits your risk to exporters.
What are the terms of payment in a letter of credit?
There are many types of payment terms that you can arrange in your letter of credit. In this case, the main two types of payment terms are Acceptance Credits and Deferred Credits. An Acceptance Credit is when you, as the importer, agree to pay the exporter almost immediately when they submit the shipping paperwork to your sponsoring financial firm, like WIP Funding.
A Deferred Credits is considered a compromise, as the exporter gets paid at a reasonable time and you have some proof that your merchandise is en route. The Deferred Credit is when you agree to pay your exporter sometime after the shipping has been submitted; generally 90 days from the paperwork or even a certain amount of days after you see the product. The Deferred Credit can provide extra liquidity, as well.
By using letters of credit in international trade, your business increases its trust with your foreign suppliers, has the advice, foreign knowledge and credit of WIP Funding and allows for flexibility in payment when negotiating the contract. A letter of credit overall fosters a good relationship between you and your supplier. Also, it gives you the much-needed liquidity your business needs.