Private Financial Institutions Are the Best Choice foran Import Business

When commodities are in short supply in local markets savvy traders will import the said commodities from outside sources. When a particular consumer item is in short supply, this will mean that the price for this item automatically goes up as it is a rare commodity. Therefore running an import business can be lucrative and at times can bring in much more income than originally anticipated. The finances that support this system are known as import finance that Banks and Financial Institutions extend towards the traders involved in import and export.

You may be wondering why there is a requirement for financial institutions to be involved in trade when the importer can use their own money to support their business. What it boils down to is a matter of trust, and traders normally do not have the kind of finances needed when the commodities they import are in larger quantities. When an import deal is put forward, the matter of trust can raise its ugly head, and both the importer and exporter will require an intermediary in order to guarantee the delivery of goods as well as payment to the seller.

Many trades require instant financing, and only Financial Institutions and Banks have the capacity and experience to support such trades. The Bank or Financial Institution will intervene if the exporter thinks that the payment for the ordered goods will not reach them in time and similarly the importer will inform the Bank or financial institution if they think that the ordered goods will not reach them in full. This deadlock can be resolved by the Bank under an agreement with the importer or the buyer of the imported goods.

Letters of Credit are the financial instrument most used to solve deadlocks when a letter of credit is extended towards the buyer by his bank guaranteeing payment to the seller. If the seller comes with the letter of credit to the bank claiming that he has not received the agreed payment from the buyer, the bank will then pay the amount fully as mentioned in the agreement with the buyer. This arrangement works well as the bank will later collect the paid amount from the buyer either in installments or in full at an interest rate agreed by both the bank and the buyer.

Private funding for such a venture is, therefore, a better option because they can waive several restrictions governing the loan agreement while offering import finance to those who have a bad credit history for example. Private financial institutions are independent entities hence they don’t need to answer to the authorities and therefore have a more flexible approach to lending money to traders.

Private funding for such a venture is, therefore, a better option because they can waive several restrictions governing the loan agreement while offering import finance to those who have a bad credit history for example