Trade Finance
Used by importers and exporters to finance the purchase or sale of goods from or to overseas markets.
Financed by L/Cs (letters of credit) issued by banks or financiers of the borrower.
The period of finance under an L/C can range from 30 days to 270 days. It covers transit time for goods to travel between the relevant markets, clear customs and be delivered to buyer, and may be extended to cover time to value add, e.g. assemble components before resale.
Rational for use of letters of credit
Letters of credit are very useful when the trading parties have not got a trusted or established relationship, but wish to make a substantial transaction (over $10,000). In these circumstances there is a risk that only one side of the transaction is completed, i.e. either the goods are sent and the payment not received, or the payment is sent and the goods are not received. A letter of credit facility introduces a trusted third party, i.e. the bank, to guarantee the supplier will be paid once the goods have been delivered ready for collection by the customer. This provides comfort to the supplier that they will get paid, and to the customer that they will get the goods.
Benefits of Letter of Credit to Importers and Exporters
Enables the import business to use its cash flow elsewhere in the business, and removes the usual requirement for a full deposit to fund the purchase, which may be required well ahead of the delivery of the goods depending on the terms and timing of the trade agreement.
Letters of credit are commonly used by wholesale or retail traders to fund the cost of imported goods until they have received payment from their customers, (usually 120 days).
Use of letters of credit releases funds to an exporter at the time the goods are shipped so that they do not need to wait until the goods are received to be paid.
This is particularly useful for exporters who use sea-freight and may otherwise have to wait many weeks for payment. Export Finance enables them to manage their cash-flow, usually at lower cost than a line of credit.
BizExchange understands that whether you are buying or selling a business, business financing is a likely consideration. We also know that finding the right person at the bank to deal with your issues is not always as easy as it should be.
This is why we have established relationships with a range of financial providers so that you can complete one form and have it received by the right person at each of the institutions you have nominated. Not only that, we know their lending criteria, so we will only present you with the banks that are prepared to consider your application.
