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What are the financing options for importers?
Q. What are the
financing options for importers?
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A. Financing
options for importer.
The financing
requirements of each importer will be determined by the following:
- The cash reserves of the company.
- The volume of their sales.
- The costs of their materials, labour, overheads etc.
- The amount of trade credit granted or received.
- The level of investment in fixed assets.
- The strength of the company’s credit policies and collection
procedures.
There are two main
sources of finance for importers:
- Bank Borrowings
- Trade Credit
Bank Borrowings:
Banks and their subsidiaries
offer a wide range of financing options to their importing clients including
the following:
Overdrafts: Used to support
short term working capital needs. Repayable on demand. Security may be
required.
Term Loan: Used to fund
specific project, investment or fixed asset acquisition. Fixed repayment
schedule over agreed period. Security may be required.
Leasing/Hire Purchase:Used to
fund asset acquisition. Agreed repayment schedule. Security may be
required.
Invoice Discounting: Source of
short term funding. Combination of repayment on demand/agreed schedule.
Company’s debtor book provides the main security.
Letters of Credit/Guarantees:
Source of credit enhancement that can improve access to trade credit
funding. Combination of repayment on demand/agreed schedule. Security may be
required.
Project Finance: Source of
medium to long term funding. Financing provided to support self-financing
projects. Agreed repayment schedule. Security may be required.
Importers should
contact their local AIB branch manager or their corporate relationship manager
for details of AIB Group’s credit services. All credit facilities are
subject to approval by the bank.
Trade Credit:
- Although many suppliers will factor the cost of granting credit into
the cost of their goods, it can still be a relatively cheap and convenient
source of funding. However, many importing companies may not be able to
negotiate trade credit on their own. Importers may find it easier to negotiate
credit terms if they agree to use one of the more secure payment options such
as Letters of Credit or Documentary Collections.
An importer offering to accept Bills of Exchange or issue a
Promissory Note under a documentary obligation may find their suppliers are
more willing to grant them credit terms. This is because suppliers are aware
that in many countries failure to honour an accepted Bill of Exchange or pay a
Promissory Note may be considered an act of bankruptcy and that the legal
processes supporting the enforcement of such obligations are relatively cheap
and efficient.
An importer offering Letters of Credit as a payment option is
utilising their access to bank credit to gain extended trade credit. Issuing a
Letter of Credit can encourage a supplier to extend credit to an importer in
circumstances where the supplier would not normally extend credit. The
independent bank guarantee inherent in a Letter of Credit provides suppliers
with confidence that they will be paid. The importer will find that using
Letters of Credit, to defer the payment for goods to a future date, involves
lower costs when compared to using their overdraft or other bank facilities to
pay for the goods immediately, either at time of shipment or delivery.
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