Trade finance essentials
Importing and exporting can stretch your finances to the limit, simply because it takes so much longer to transport your goods to market, clear them through customs, and get them into the hands of your distributor or customer.
Depending on your payment terms and shipping arrangements, that can open up a sizeable cash flow gap, thanks to the time lag between paying for a product and getting paid by your customer.
Then there are the simple mechanics of trading to consider. How and when are you going to be paid for your goods, while still giving your overseas distributor a fair deal?
Fortunately, there are a range of finance solutions you can use to make things easier. Here are some of the most frequently used.
| Payment terms | |
|---|---|
| Cash in advance | The importer pays upfront before the goods are shipped. |
| Open account or clean payment | The importer can order goods up to an agreed value “on account”, before settling on agreed terms (for example, 30 days from despatch). |
| Sight or term documentary collection |
With sight documentary collection, the importer pays for the goods at sight, after taking up the shipping documents that allow the goods to be released to them. The exporter’s bank sends the documents to the importer’s bank, and the importer then pays their bank, which remits the funds back to the exporter. The process for term documentary collection is the same, except that shipping documents are released and payment is received by the exporter through its bank after the agreed term; for example, after 60 days. |
| Finance Solutions | |
|---|---|
| International money transfers | An electronic funds transfer to a foreign bank. Usually provides cleared funds in around three days. |
| Letter of credit or documentary credit | A conditional guarantee from the importer’s bank to the exporter via their bank, guaranteeing payment when the shipping documents are released. A letter of credit allows the exporter to ship the goods, confident that they will be paid for them, based on the credit standing of the importer’s bank. |
| Trade advance | A short-term loan for importers or exporters, helping them to close the cash flow gap. |
| Insured export finance |
Allows exporters to take out short-term loans against invoices billed to a (primarily) overseas debtor. The invoiced debtor is insured by an eligible trade credit insurer. On open account transactions, you can borrow up to a maximum of 81% of the value of each invoice. Insured export finance can be used with both open account and documentary collection payment terms. |
Where to find out more
- Austrade
- Australian Institute for Export
- Commonwealth government guide
- Commonwealth government Export Hub
- Export Finance and Insurance Corporation
- Australian Customs Service
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Important information
As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb)
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