Import and Trade Finance

Budgeting for Duties, Freight and Customs Bonds

Most commercial imports that go through formal entry need a customs bond, which guarantees payment of duties, taxes and fees to U.S. Customs and Border Protection. Duty rates depend on the product's classification and country of origin, and they can change with trade policy, so build a margin into your cash plan.

A hypothetical example shows how costs stack up. A business orders $100,000 of goods, pays $30,000 at order and $70,000 before shipment, then pays $8,000 in freight and insurance. If duties for this product were 10% of the goods' value, that adds $10,000, and brokerage and port fees add $2,000. The total landed cost is $120,000, all paid before the first unit sells.

SBA and Government-Backed Programs

Federal trade programs lean toward exporters. According to the SBA, its International Trade Loan, up to $5 million with a guarantee of up to 90%, is aimed at small businesses entering or expanding into international markets and those hurt by import competition. Its Export Working Capital loan, also up to $5 million, funds export sales. The federal export credit agency likewise focuses on U.S. exporters.

Importers buying goods for domestic resale usually turn to standard SBA 7(a) loans or revolving lines for working capital instead. If you both import and export, ask a lender whether part of your business qualifies for the trade programs.

Managing Currency and Supplier Risk

• Currency. If you pay in a foreign currency, a forward contract can lock in an exchange rate for a future payment.

• Supplier checks. Verify a new supplier's registration, references and production capacity before paying deposits.

• Pre-shipment inspection. Independent inspectors can confirm quantity and quality before you release the balance.

• Document accuracy. Errors in invoices or shipping documents can delay customs clearance and payment under a letter of credit.

Frequently Asked Questions

Is trade finance only for large companies?
No. Smaller importers use letters of credit, purchase order financing and inventory lines every day. Banks may require collateral or cash for smaller businesses without much history.

Can I finance goods while they are on the water?
Sometimes. Lenders that control the bill of lading and see adequate insurance may include goods in transit in the borrowing base, often at a lower advance rate.

What is the cheapest way to pay an overseas supplier?
Open account terms are usually cheapest, but suppliers typically offer them only after a track record. Letters of credit cost more but protect both sides on new relationships.

Explore Financing Options for Your Business

If imports are tying up your cash for months at a time, map your full timeline from deposit to sale and add up your landed costs. Then compare letters of credit, order-based funding and inventory lines, and choose the mix that keeps goods moving and your working capital intact.

Trade finance is the set of tools that helps businesses pay for goods bought across borders while managing the risk that a supplier does not ship or a buyer does not pay. For U.S. importers, it covers letters of credit, supplier terms and import financing that funds inventory from the factory deposit until the goods are sold.

Importing ties up cash longer than buying domestically. Goods are often paid for before they leave the supplier's country, spend weeks in transit, and then face duties and fees on arrival. The right funding structure keeps that timeline from draining your working capital.

Why Importers Need Trade Finance

• Prepayment pressure. Overseas suppliers, especially new ones, often ask for a deposit with the order and the balance before shipment.

• Long transit times. Ocean freight can add weeks or months between payment and receipt.

• Landed costs. Freight, insurance, duties, brokerage and port fees all come due before goods are sold.

• Trust gaps. Buyer and seller may never have met, operate under different laws, and use different currencies.

Trade finance tools address both the cash gap and the trust gap.

Common Payment and Credit Tools

• Letters of credit. A bank promises to pay the supplier once it presents documents that meet the credit's terms. The supplier relies on the bank's promise instead of the importer's.

• Standby letters of credit. A backup guarantee that pays only if the importer fails to pay on open terms.

• Documentary collections. Banks pass shipping documents to the importer only when it pays or accepts a draft. Cheaper than a letter of credit, but with less protection for both sides.

• Open account. The supplier ships and invoices on terms, like a domestic sale. It is the cheapest option for the importer and needs established trust.

• Cash in advance. The importer pays before shipment. Simple for the supplier, risky for the buyer.

How a Letter of Credit Works for an Importer

1. You and the supplier agree in the sales contract that payment will be made by letter of credit.

2. You apply to your bank, which issues the credit and sends it to the supplier's bank.

3. The supplier ships the goods and presents the required documents, such as the commercial invoice, bill of lading and packing list.

4. The banks check the documents against the credit's terms. If they comply, the supplier is paid, either at sight or on a set future date.

5. You repay your bank, often through a credit line, and receive the documents needed to claim the goods.

In the United States, letters of credit are governed by Article 5 of the Uniform Commercial Code, and most international credits also follow a widely used set of standard rules. Banks pay on documents, not on the condition of the goods, so precise wording in the credit matters. Issuing a letter of credit uses part of your credit capacity or requires cash collateral.

Import Financing Options for Inventory

• Purchase order financing. A specialty lender pays your supplier, often by letter of credit, against a confirmed customer order, then is repaid when your customer pays.

• Inventory and asset-based lines. Borrow against goods once they land in your warehouse. Some lenders also count goods in transit when they control the bill of lading and the goods are insured.

• Transactional import loans. Short-term loans tied to a single shipment and repaid from its sale.

• Supplier credit. Terms negotiated directly with the factory as the relationship matures.