Trade Finance for Australian Importers

Key takeaways

• The funding gap is shipping time plus warehousing plus your debtor days.
• A letter of credit substitutes the bank's credit for yours, which suits new supplier relationships.
• Facilities are generally secured over the goods, plus a general security agreement.
• Currency movement between order and payment can erase the margin - hedge or price for it.

The gap being funded

A typical import cycle:

Funding that from cash flow requires holding several months of stock value in working capital permanently - which is exactly what constrains importers as they grow.

The instruments

• Letter of credit - the bank undertakes to pay the supplier once shipping documents comply. Costly, but it lets you trade with a supplier who does not yet trust you, and vice versa.
• Documentary collection - cheaper than an LC, with the bank handling documents but not guaranteeing payment.
• Trade or import loan - a straightforward advance against the purchase, repaid when the stock sells.
• Supply chain finance - the buyer's credit rating funds early payment to suppliers, generally only available to larger buyers.

The currency risk nobody budgets for

If you order in USD and the Australian dollar falls 5% between order and payment, your landed cost rises 5% - frequently more than the entire net margin on the shipment.

Options are to buy the currency forward at order, use a facility that fixes the AUD cost, or price with an explicit currency buffer. Doing none of these is a bet on the exchange rate, whether or not it is recognised as one.

Frequently asked questions

Do I need property security for trade finance?

Not always. Facilities are commonly secured over the goods and a general security agreement, which is one of the main attractions. Larger limits may still require property.

How much does a letter of credit cost?

Typically a percentage of the value plus document handling fees, and it consumes facility limit for the period it is open. It is the most expensive option, bought for the certainty it provides.

Can a new importer get trade finance?

It is harder without a trading history, but achievable where there are confirmed purchase orders from creditworthy customers, or where directors provide additional security.

Related reading

• Invoice Finance and Debtor Finance: A Practical Guide
• Small Business Line of Credit: How It Works and When to Use One
• Business Loan Types: A Complete Australian Guide

Sources

• Exporting and importing finance — Austrade
• Business finance options — business.gov.au