Payment and costing
Trade finance, in plain terms.
Importing consumes cash before it produces any. A deposit leaves months before the goods sell, and growth makes the gap larger rather than smaller. Trade finance is the general name for arrangements that fill it, and every one of them has a cost and a condition attached.
Why growth makes it worse.
A single container is a cash flow event. A programme of containers is a permanent working capital requirement, because you are paying for the next shipment while still waiting to be paid for the last one.
That is the specific way importing businesses fail while trading profitably. The margin is real and the cash is somewhere between a deposit in Java and an invoice with your customer, and neither of those pays a supplier.
The cycle from Indonesia is longer than from a domestic supplier by the length of the voyage plus the production, so the same volume ties up more cash than a local equivalent would.
What the instruments actually do.
Each of these moves the timing rather than the total, and each is priced accordingly.
- Trade or import finance
- A facility that pays your supplier and is repaid when you are paid or on an agreed date. It converts a cash problem into a financing cost, and it generally requires a track record.
- Invoice or receivables finance
- Advancing against what your customers owe you, which helps at the other end of the cycle. It depends on the quality of your customers rather than on your suppliers.
- Documentary credit
- Primarily a payment security mechanism and it also delays your outlay to presentation of documents. It costs bank fees at both ends and considerable care in drafting.
- Supplier terms
- The cheapest form of finance in existence, when an Indonesian producer will grant it. Rare on a first order and occasionally available once a relationship is established, and worth asking about.
What a lender looks at.
The goods, and whether they are commodity enough to be worth something to somebody other than you. The buyer, and whether your customers pay. The chain, and whether the documents actually work.
This is where documentary discipline pays a second time. A buyer with clean contracts, real inspection reports and a supplier whose registration checks out presents a far better case than one with a WhatsApp thread and a proforma.
Questions buyers ask.
Do I need trade finance for a first container?
Usually not, and most first orders are funded from working capital because they are deliberately small. The question becomes real at the point where you are running consecutive shipments, which is also the point where a lender has a track record to look at.
Is a letter of credit a financing tool?
Mainly a payment security mechanism, and it does move when your money leaves. It costs bank fees at both ends and it needs careful drafting, and on a small order those costs can approach the value of the protection.
Will an Indonesian supplier give me terms?
Very rarely on a first order and it happens once a relationship is established, particularly where you order regularly and pay on time. It is the cheapest finance available and it is earned rather than negotiated.
Read next.
Paying an Indonesian supplier
T/T, letters of credit and documentary collection, what each actually protects, and the five rules that stop a deposit disappearing.
Working out a landed cost
Everything between the factory price and the shelf. The twelve lines it contains, and the four that buyers forget.
Currency risk on an import order
Most Indonesian export trade is in dollars, so two currencies move against you. Where the exposure sits and what reduces it.
What it takes to start
Not a figure, a structure. Which costs come before revenue and how long money is tied up.
Letter of credit
A bank promise to pay when named documents are presented exactly as specified. What it protects and what it very deliberately does not.
Bill of lading
The bill of lading does three jobs at once, and the third one is why an original in the wrong hands can hold up a container that has already arrived.
Pricing what you import
Landed cost is the floor, not the price. What sits between, and the four costs that never appear on an invoice.
Buying before the harvest
Committing to a crop that does not exist yet. What it protects and what it exposes.
How the money moves
Correspondent banks, charges nobody quoted, and why they received less than you sent.
Scaling up
What worked on a first order stops working at volume. Which parts break and what replaces them.
Sourcing from Indonesia?
Tell us the product, the quantity and the destination. We come back with what it involves before anyone talks about money.