My supplier wants a huge deposit. What do I do?
If you're an importer and your overseas supplier wants a huge deposit before they'll supply the goods, what do you do? Consider a letter of credit.
Suppliers want money up front
If you haven't worked with a supplier before, they'll generally want a significant deposit before they'll start work or send any goods – particularly if they're overseas. This is understandable, but it creates real cash flow problems for most importers. In these situations, a letter of credit is an option.
Letter of credit – how it works
A letter of credit is a document that guarantees payment by the lender to a third party if certain conditions are met.
Importantly, it's a way of dealing with your supplier's demands without having to part with any cash up front. Here's how a letter of credit works:
- Go to an finance broker.
- Apply to a lender for a letter of credit through your broker.
- If approved, your lender will send the letter of credit to your supplier's bank.
- Your supplier's bank then notifies their client that the letter of credit has been received, and that they can ship the goods with guarantee of payment.
- You pay your supplier for the goods when you receive them.
Letter of credit – a specialist business finance product
Letters of credit can improve your cash flow. However, they can be expensive and they are a specialist area. Get the foreign exchange arrangements or loan conditions wrong, and it could cost you big time.
For this reason getting an expert is always advised, so contact an MFAA Accredited Finance Broker today.