How Does One Use Letters of Credit to Finance Goods Import and Subsequent Sales?
Approximately 90% of the world’s international trade receives financing through a trade financing instrument. Trade finance includes credit insurance, export credit, bid and performance bonds, lending, trade-related promissory notes, letters of credit, purchase order funding, bills of exchange, trade acceptance drafts, supply chain financing, and invoice factoring.
Letters of Credit & Import Trade Financing
Trade lines through banks have limits. However, with Factoring, your company can finance over and above the typical constraints that banks have on funding. Factors can typically fund all landed costs of goods imported. Factoring is a better way to grow a business without giving up precious equity in your company.
For new importers, a letter of credit is a document from a finance company that guarantees a seller or supplier will receive payment on order if they meet quality, quantity and timeliness parameters. The letter of credit will require you to follow that certain delivery conditions. However, as long as that happens, the finance company guarantees the payment. The factoring company can supply customers with letters of credit, and they are precious when doing business. The factor gets your order moved to the front of the line before unsecured orders.
Once the factor issues a letter of credit, they have extended their credit and payment guarantee instead of the company’s credit. An extension of the factor’s credit is essential for a new business owner who doesn’t have at least two years of good credit established. Some suppliers will not fill a new company’s order without this agreement, or they give preferential treatment to orders that come with a letter of credit.