Import Business Loans: How to Finance an Import Business
Getting a Business Loan for an Import Business
Starting an import business means taking part in an incredibly lucrative industry—according to the International Trade Center, the total value of imported goods in 2017 was over $2.4 billion. Direct experience in the import/export industry can only help you in running an import business, but the import merchant business is conducive to scrappy solopreneurs with a natural sales streak and a knack for making cross-cultural connections. As an entrepreneurial importer, you’re solely responsible for connecting with international exporters (whether they’re retailers, manufacturers, distributors, or individual artisans), then buying packaging, shipping, and reselling the product yourself.
As is the case with businesses in every field, however, import business owners will likely run into cash flow problems at some point. But because this field presents special operational and financial challenges, import business loans may not be the traditional term loan you’re thinking of.
While there are many loans available to export businesses, like the SBA Export Express Loan or SBA Export Working Capital Program, businesses engaged purely in importing goods have fewer options. You certainly have financing options—you may just need to look a little outside the box.
So when seeking an import business loan, look into these six financing options to free up your cash flow and continue to introduce foreign products into the domestic market.
Why Do You Need an Import Business Loan?
If you’re a freelance import merchant, you might not have to cover too many overhead or startup costs, like office space and payroll, as import businesses can easily be launched from your own home.
Rather, your major (and ongoing) expenses are going to be the costs of your products proper, then packaging and shipping them into the country; and incidental expenses like taxes and duty fees, potentially hiring a customs broker to help you manage legal and documentation logistics, and other daily operational costs.
But prepaying your foreign manufacturers means that your capital—and the product you need to sell—is inaccessible for months at a time while the products are created, packaged, and shipped. And even after you sell your goods to your customers, it may take your customers another few months to pay their invoices.
Because of this payment system, import businesses can be especially vulnerable to cash flow shortages. As a result, import business owners may be forced to pay their suppliers late, which potentially compromises crucial relationships. And without the cash to buy exported goods, of course, you can’t run an import business at all.
That’s why import business loans, in whatever shape they take, are so important to research—ideally well before you’re critically short on cash.
6 Import Business Loan Options
If you’re looking for an import business loan, you may not be able to show evidence of steady cash flow or profitability that most business lenders want to see to feel comfortable extending credit. So your best course of action might be to leverage those invoices and inventory as collateral.
Using your inventory as collateral offers lenders a safety net in case you can’t ultimately pay your debt. On the other hand, using your invoices as collateral offers hard proof that you can pay your debt—just as soon as your customer fulfills their payment.
That said, if your business is more established, you might be able to secure a traditional working capital loan from your bank or an alternative lender to cover your daily operational costs. You might also be able to take advantage of your commercial bank’s trade services.
These financial solutions only scratch the surface of what’s available for importers, but these six import business loan options are a good place to start your research.
Inventory Financing
With inventory financing, your lender can front you the cash you need to purchase goods when funds are running low; and the inventory you buy with the loan then acts as collateral to secure the loan—in other words, the lender will reclaim and liquidate your inventory if you can’t repay your debt. But if you’re truly solvent enough to take on additional debt (of which you’ll need to be certain before taking on any type of business loan), that prospect is unlikely, and it shouldn’t scare you off of this import business loan option.
Obviously, inventory financing is only an option for businesses whose inventory is their most valuable asset, and who need inventory to operate at all. And in that way, import businesses fit the bill exactly.
Beyond this requirement, however, know that most inventory lenders will require an extensive due diligence process after they receive your application, and that process will likely include a field audit of your business and inventory. Since the lender will need to liquidate and sell your assets if you default on your loan, they need to be certain that that inventory is valuable enough to recoup most or all of the potential debt. The auditing process can take some time to complete, so inventory financing may not be the best import business loan option for companies that need cash in-hand ASAP.
Invoice Financing or Invoice Factoring
Like inventory financing, invoice financing is a self-secured loan that gives business owners access to short-term working capital when cash is low. In this case, however, your unpaid invoices act as collateral. Typically, financing companies front borrowers up to 85% of the total amount of their unpaid invoices, then release the final amount when payment is fulfilled, minus their fees.
Invoice financing is especially useful as an import business loan. Depending on the terms of their invoices, import businesses might not be paid by their buyers for 30-90 days. That leaves a long lag time between payments, which importers could be using to purchase even more goods for import.
To qualify for invoice financing, lenders most closely evaluate the value of your invoices as well as your customers’ reputation and creditworthiness, since they’re responsible for fulfilling their payment. If you’re approved for invoice financing, you can get that cash in hand much quicker than you would if you’d gone the inventory financing route. If you’re in dire need of cash, invoice financing may be a better option for your import business.
And not to be confused with invoice financing, opting for invoice factoring means selling your unpaid invoices to a third-party invoice factoring company, which gives you quick access to cash. From there on out, the company handles the collection of payment on your unpaid accounts receivables.
Purchase Order Financing
Purchase order financing is a logical import business loan for importers whose suppliers ask to be paid before the goods are shipped, but who don’t currently have the cash to meet those terms.
Rather than lending you cash, in this scenario your purchase order financing company fronts your supplier up to 100% of the money they need to manufacture and ship their goods directly to your customer. (Generally, the stronger your profit margins, the more money the financing company will cover.) Once your customer receives the product, you’ll invoice them and use the proceeds to repay your PO financing company, plus their fees.
To be eligible for purchase order financing, you’ll need to show evidence of strong profit margins (at least 15% to 20%), customers with good credit scores, and trustworthy suppliers who can deliver on time, among other factors.
Business Line of Credit
Almost every small business—including import businesses—can benefit from a business line of credit at some point in their lifetimes (if they secure a line of credit with affordable terms, of course).
Basically, a business line of credit is a revolving resource that you can dip into whenever you want, so you can use it to take advantage of sudden opportunities or as a safety net when cash is short. And since you can pull whatever amount you need, lines of credit are great financing tools to cover basic operational expenses, like covering rent, payroll, or marketing costs. You’re only responsible for repaying the funds you use, plus interest.
Lenders determine a borrower’s eligibility for a line of credit, as well as the loan amount, based on factors like the business’s credit score, time in business, and annual revenue. If you can’t qualify for a line of credit from your bank, look into alternative lenders like Bluevine or OnDeck, which offer borrowers short-term lines of credit on much less stringent qualifying criteria.
Letter of Credit
When dealing with international trade there’s always a level of risk involved, especially when taking into account the potential logistical, political, and credit complications associated with your exporter, as well as currency changes. To best mitigate that risk, look toward your commercial bank for their specialized trade solutions—TD Bank, Citibank, and Chase, for instance, all offer services that help international trade businesses manage their transactions and finances.
A common service banks can offer importers is a letter of credit, also known as a documentary credit. LCs aren’t loans as such—rather, they’re financing tools in which the bank guarantees on behalf of the importer that the imported goods will be paid for once the exporter meets certain conditions. Typically, those conditions include providing an invoice in the correct amount, a bill of lading, shipping goods within an agreed-upon time frame, and providing other documentary evidence of the proper fulfillment of the order, but your bank will work with you to establish those conditions.
Once established, your bank will send that letter of credit to your exporter’s bank, which then gives the exporter the go-ahead to produce and ship their product to you. Then you’ll pay your bank, who will transmit the funds to the exporter’s bank.
In this scenario your bank essentially acts as your agent during this complex payment process, which offers you much greater protection and flexibility than if you’d handled it yourself. Having a letter of credit in hand as payment might also allow you to negotiate better terms with your exporter. To secure a letter of credit, your bank will mostly evaluate your creditworthiness and how long your business has been operating.
Using Your Import Business Loan To Grow Your Business
Running an import business is an expensive (and potentially risky) endeavor—even if the rugs, furniture, toys, garments, wine, pottery, cheese, or any other item you’re importing is cheap on the ground, the costs required to properly ship those goods can be steep. But because importers may not receive payment for up to a few months after sale, importers may be consistently short on cash, which can stall or even entirely halt their operations.
But that’s the role of an import business loan (or any type of business loan, for that matter)—depending on what you qualify for and can afford, any one of these solutions can free up your cash flow so you can pay your suppliers in a timely manner, continue to make purchases, and invest in your business’s growth with things like marketing campaigns, hiring employees, and upgrading your office space.
Also know that, although helming an import business is as complex as it is costly, there are tons of resources available to help you. Look into trade organizations like the American Association of Exporters & Importers (AAEI) and the International Trade Administration (ITA), as well as small business organizations like the SBA and SCORE. These resources can help you navigate tricky import transactions to make sure your interests are protected, and that your processes remain aboveboard.
Once you’re certain your operations are copacetic—and solvent—you can focus your energy on introducing the American market to your incredible exotic goods.
Caroline Goldstein
Caroline Goldstein is a contributing writer for Fundera.
Caroline is a freelance writer and editor, specializing in small business and finance. She has covered topics such as lending, credit cards, marketing, and starting a business for Fundera. Her work has appeared in JPMorgan Chase, Prevention, Refinery29, Bustle, Men’s Health, and more.