TradePort Export Finance Online The Source for California Trade Finance   Globe graphic
       


TEFO Home
About TEFO
Management Team
Products & Services
Trade Glossary
Import Finance Tutorial
Export Finance Tutorial

Pre-Import Working Capital Loan Program

Introduction

For a North American Importer/Distributor an import transaction can present a major financial challenge. This stems from the fact that most imports are relatively large wholesale purchase orders, and imports by ocean shipment can take many weeks of delivery time. After spending significant time and resources to develop import sales, American importers often can not secure the funds they need to complete the orders. Even when an importer obtains a letter of credit from their American buyer, a limited few of the 9600 banks operating in North America are willing to finance the importer's import purchase based only on the Letter of Credit collateral. This transaction based type of trade financing supported by letters of credit is rarely found in North America . The extensive skills, abilities and knowledge required to provide this type of financing is more commonly found in the financial centers of traditional trading nations such as Hong Kong, London , Zurich . Each deal requires a thorough understanding of the transaction and sufficient due diligence in order to mitigate the risk inherent in this type of trade financing. Only a few lenders in North America have the ability to structure this financing and to actually provide it.

Example

Fresco Corporation is an importer of specialty produce and other food products from Mexico . The company President, Mr. Martinez, had negotiated the supply of various food products with grower cooperatives in Mexico . The cooperative grower members were keen to begin export of volumes of product direct to the U.S. rather than through multiple intermediaries. Mr. Martinez also connected with a 19 store Market Chains in Los Angeles that was interested in contracting for purchase of volumes of food products direct from the Mexican growers. The Market Chain Purchasing Manager was impressed with the plan and the potential cost savings. Because of the level of cost savings the Purchasing Manager was willing to open a 6 month Revolving Letter of Credit for $435,000 in favor of Fresco. The terms of the L/C allowed weekly drawdowns of funds based on warehouse receipts.

Although Fresco could obtain the L/C, the deal could not proceed because the supplier in Mexico still needed assurance that they would be paid. Mr. Martinez and the Fresco company are well known to the principals of TEFO. Mr. Martinez consulted with TEFO on the gaps in the transaction. We recommended our Trade finance partner's Pre-Import Working Capital Loan Program to finance the importation costs. We also suggested that TEFO provide a commitment to the Mexican supplier that they would get payment for the shipment of product before Fresco Corporation received any funds.

The weekly shipments of product from Mexico began. TEFO worked with Fresco to submit all the documents required by the Letter of Credit to the negotiating bank. TEFO's Trade finance partner was reimbursed for each drawdown of loans and fees by the negotiating bank under an Assignment of Proceeds issued by Fresco. The Mexican growers, the Market Chain and Fresco all benefited from the transaction.

Features

  • Requires that an Irrevocable Documentary Letter of Credit be opened by a North American buyer in favor of beneficiary importer.
  • Provides working capital to the L/C beneficiary to pay designated suppliers.
  • Financing available in amounts from US $10,000 to $10,000,000.
  • Loan repayment from funds generated through negotiated Letter of Credit.
  • Loan amount covers cost to produce or purchase product - not profit margin
  • Collateral normally only the Assignment of Proceeds of L/C and promissory note from the beneficiary.
  • Financing ranges from a minimum time of 5 days to a maximum of 180 days.
  • Funds disbursed to suppliers by wire transfer or Back to Back Letters of Credit.
  • Streamlined online application process; fast decision turnaround.
  • Support for single transactions or multiple sales under L/Cs.
  • Preliminary commitment provided on standard L/C deals that meet basic parameters.

Prerequisites

  • For beneficiary of an Irrevocable Documentary Letter of Credit.
  • Documentary Letter of Credit to be issued by accredited bank.
  • For organizations with a track record of profitably producing and/or marketing goods.
  • Importer management must have strong credibility.
  • Loan proceeds must be used to comply with terms of the Letter of Credit.

Advantages to Importer

  • Provides quick access to working capital to support import purchase order.
  • Increases import volume capability and profitability.
  • Increases cash flow and financial capacity to perform the import contract.
  • Leads to strengthened balance sheet and enhanced borrowing potential.
  • Financing does not impact existing bank credit lines.
  • Provides supplemental financing beyond what current lender may be able or willing to provide.
  • Funds business growth/expansion without selling equity or increasing bank credit line.

Disadvantages to Importer

  • Higher cost than standard bank financing.
  • Requires enforced attention to details of letter of credit terms and conditions.
  • Transaction normally secured with a non-collateral promissory note.
  • Larger transactions may require inventory collateral and/or personal guarantees.  

Letter of Credit Terms and Conditions

  • Freely negotiable irrevocable documentary Letter of credit from recognized bank.
  • No "Applicant documents" that are outside the control of beneficiary.
  • No "split" Bills of Lading.
  • Third party documents allowed.
  • Partial shipments allowed.
  • Currency in US dollars or other major currencies.
  • Tenor to be Sight Draft or usance Time Draft up to 180 days.
  • Payment by Sight Draft Negotiation or discount of Bankers Acceptance

Procedure

  • Importer may obtain guidance from lender during negotiations with domestic Buyer
  • Importer negotiates letter of credit terms and conditions as part of purchase contract
  • Importer - beneficiary of the L/C - applies to the lender for pre-import financing.
  • Lender reviews application, copy of L/C and conducts due diligence.
  • Importer assigns proceeds of L/C to the lender for the loan amount and mark-up.
  • Lender disburses funds to Importer and/or Importer's suppliers.
  • Lender coordinates and manages the transaction documents on behalf of the Importer.
  • Supplier ships product and Importer submits documents to Lender.
  • Lender submits documents to negotiating bank.
  • Negotiating bank negotiates Letter of Credit and disburses proceeds of L/C.
  • The negotiating bank reimburses the Lender for loan amount and service fee
  • The negotiating bank remits remaining funds to L/C beneficiary/ Importer.

Application Process

  • Written application.
  • Full description of the underlying transaction.
  • Original L/C or Preliminary Advice of L/C.
  • Importer may request a Preliminary Commitment.
  • Importer may request a Final Commitment.
  • Lender's turnaround time for first deal is generally within 10 working days.

Costs

  • $10K - $1M: 5.0% per month, minimum 30 days
  • $1M - $10M: 0.17% per day, no minimum days
  • Maximum term is 180 days.

 

Copyright © 2004, 2005 Ted S. Eastman. None of the contents of this article may be reproduced or republished without the express permission of the author

 


We take your privacy and the security of your company's information very seriously. Please view our privacy and security policy.

© 2007 TradePort Export Finance Online: The Source for California Trade Finance - info@tefo.com
Home | About TEFO | Products & Services