Importing goods from other countries can result in huge amounts of working capital being tied up, from the time the order is placed, to the time that the goods are released from customs (and this can take weeks). Therefore, many companies look to lenders to provide them with cash, to tide them over until they are able to sell the imported goods.
There are lenders who specialise in finance for international trade. The added advantage for a small business to work with these companies is that they can benefit from their knowledge of the logistics involved in international trade. This is extremely valuable for first-time importers and shortens their learning curve.
Another advantage is that these lenders are also willing to consider using the imported goods as collateral against the loan. However, this does depend on the type of goods being imported. The easier the goods are to sell, the larger the value the lender will attach to them.
How import finance works
As a business that is relatively new to importing, it is best to investigate your finance options long before you conclude the import deal. Since you have yet to establish a reputation as an importer, the lender will expect you to make a good business case that convinces them that importing is a good idea, and more importantly, that the business will soon recover the cost of the imports.
They will also need time to go through your application and check your creditworthiness. Expect them to check the creditworthiness of the overseas supplier as well, and to evaluate whether the goods you intend importing can be used as collateral.
Working with lenders that are experienced in international trade will help tremendously, as they can also advise you on options to insure the goods, and to insure against exchange control fluctuations.
Thereafter, you need to submit a formal application and once accepted, the lender issues a letter of credit. This letter of credit is the assurance your supplier needs in order to release the goods and begin the process of transporting the goods to South Africa.
The supplier is paid by the financier once documentary proof is given by the supplier that the goods have been shipped. The goods remain the property of the lender with the insurance ceded to them until they have landed in South Africa. It is common practice to be given 180 days to repay the loan.
The cost of import finance
Lenders who specialise in international trade use the London Interbank Offered Rate (LIBOR) in order to calculate the interest rate charged on your loan. LIBOR is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. It serves as the first step to calculating interest rates on various loans throughout the world.
The cost of the import finance is typically made up of interest changed at LIBOR plus 5% (this percentage will change depending upon current economic conditions), and a fee that import lenders call a “commission”, usually in the region of 4% of the value of the deal over 180 days.
The commission drops if payment is made before the term of the loan. If, for example, you repay the loan within half that time, the commission drops by half, in other words to 2%. This is a great incentive to carefully manage the imports and sell the goods as soon as possible.
Don’t forget to add the costs of insuring the supplies during shipment, and also the cost of exchange-rate insurance to the final cost of the imports.
What are your options?
As with any loan, the total amount of finance required often dictates which financial options are available to you. Smaller amounts can sometimes be financed through personal credit. However, given the fact that international trade deals tend to only be viable if volume orders are placed, you would most likely need to approach a commercial lender.