Understanding Import Finance

  • 11 July, 2018
  • Sharon Piening

When importing equipment for your business, it’s important to understand the steps involved, particularly if import finance is required.

Import Finance is a solution used to purchase equipment from offshore. For many businesses, importing equipment is a way to maintain a competitive edge and improve productivity.

Essentially if the equipment needs to be financed, there are two key components involved:

  • A Letter of Credit needs to be arranged to facilitate the import and protect your interests
  • The Letter of Credit then coverts to a finance facility (For example a Lease Finance facility)
  • Normally, the Letter of Credit will convert to a finance facility once the goods have landed and have been inspected by the finance provider.

Arranging Import Finance

To set up the Letter of Credit and the takeout finance, (in addition to the normal financial information you will need to supply, Tax Returns, Profit and Loss etc), you will also need to provide the finance provider with:

  • A copy of the Supplier Invoice
  • The currency in which the payment is to be made (US$, GBP, EURO, JPY etc.)
  • Details of payment terms (for example an amount to be paid on shipment with the balance after installation/commissioning)
  • Shipping details – Shipping date, latest shipping date, expected arrival, final commissioning
  • Information about the supplier (Experience, reputation etc.)
  • Transit and landed insurance details
  • Details of the Freight Forwarder being used by the supplier
  • For anti-money laundering purposes, copies of driver licences, company memorandum and articles of association and trust deeds as applicable

Foreign Exchange Risk Cover – Sleep at night!

When arranging Import Finance, if the payment is to be made in a foreign currency, then the Lender will also usually require Foreign Exchange Cover to be taken out.

Foreign Exchange Cover is like an insurance policy! It protects you against any adverse move either the A$, or the currency being used to pay for the equipment.

Whilst there is a cost involved for Foreign Exchange Cover it provides peace of mind. It ensures you any savings made by importing the equipment are not obliterated (or worse) by adverse currency movements!

Formal Facility Approval

The next step in the process is formal approval of Import Finance facility.

At this point it is important to understand all the terms of approval and the conditions that need to be met so that the Letter of Credit can issue.

Payment against the Letter of Credit

Whilst it is possible to make payment for the goods by Telegraphic Transfer, this involves a fair degree of risk. For this reason, a far better option is payment against documentation – that is; a Letter of Credit.

The safety in this approach is that payment is not made by the Bank until the shipping documents have been received and are deemed to be in order.

If discrepancies are identified, payment will be withheld until they are rectified.

Commissioning & Final Payment

When the goods have been received, installed and commissioned, then a Commissioning Certificate needs to be provided to the supplier.

The supplier will present it to the Bank and request payment of the balance owing.

Conversion of the Letter of Credit to a Loan Facility

Once the final payment has been made, the Letter of Credit can be converted to a Loan Facility.

For example, it may be a Lease over 5 years with monthly payments of $x and a balloon or residual at expiry.

Before this can occur however the Finance Provider needs to inspect the goods before payment can be made.

Involve your Accountant

As structuring of any Import Finance facility is likely to have tax and GST implications, I strongly encourage my clients to always get input from their accountant before setting up Trade Finance.

Incorrect structures can be difficult to unwind and expensive!

How we can help with Import Finance

Import Finance requires specialist input as it can be a minefield. It can involve significant costs, and extensive delays, if things are not done correctly. A great idea or opportunity can quickly become your worst nightmare!

As an Equipment Finance specialist, I enjoy helping my clients navigate the Import Finance maze!

I work closely with the Trade Specialists within the major Banks (and other providers) to help my clients get the equipment they need to grow their business.

If you are thinking about importing equipment which you want to finance, don’t hesitate to give me a call!