Having an import business requires you to utilize financing options that are tailor-made to your line of operation, something that import financing deals with. Due to the various financing options under this area, each comes with its pros and cons, meaning before settling for any option, make it a point to understand which works well with your business. Below, we take a look at the advantages and disadvantages that each provides.
Letters of Credit (LCs)
Letters of credit is among the most utilized method of import financing since it relies on a legally binding commitment from an institution such as a bank promising payment to the exporter as long as the goods meet the required criteria. For this option, the exporter assumes the credit risk from the bank. The benefit of using this financing option lies in the customization it offers importers, allowing one to settle for suitable delivery and product quality terms.
The downside of using this financing method is that it is not readily available to small businesses since most banks require collateral which is a common challenge for start-ups. Letters of credit have also been found to be time-consuming, causing mishaps in the delivery process.
A business loan is a straightforward import financing option that advances importers with their preferred amount of funding. Once you get the loan, you have the option of making payments to the exporter based on your terms. Due to the flexibility that most business loans offer, importers have the room to sell their goods before loan repayment falls due. The con of business loans lies in the fact that they are hard to obtain, especially for small business importers.
For advance payment, the importer pays an upfront deposit cost to the exporter, often 100% of the total value. While it may not be considered a complete form of financing, it comes with the benefit of a simple transaction, allowing both parties to enjoy a straightforward process. The downside to this financing option is that the importers take on most of the risk, especially when the goods are not up to par with the required standards. In addition to this, it also consumes a large portion of the seller’s capital, prohibiting businesses from scaling up, a factor that could also cause issues in cash flows.
Cash Against Documents (CAD)
Cash against documents is another import financing method that requires importers to pay for the total amount of the goods before selling them. It, however, requires a third party such as a bank to hold import rights such as title and shipping documents until the importer makes the payment, after which the goods are released. The merit of using this option is that it eliminates the risk that importers often face, which leads to an easy-to-use solution compared to other methods. Even with the above advantages, it does not provide relief to importers who need significant capital.
Whichever import financing loan offers the best solution for your business, make it a point to reach out to Progressive Capital Funding today. We will help you navigate import financing to help your business succeed.