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How to buy goods to export to an importer without using your money?


Once I started having more international customers and the orders started coming in, I needed to figure out a way to:

1. Be able to pay the source of the goods (manufacturer or supplier). In some cases I did not have in my business account the amount of cash required to cover the purchase.

2. Be able to secure receiving the money from my customers once the goods were bought and shipped to them.





The export financing solution I utilized was using Irrevocable Confirmed Back to Back Letter of Credit which is most common type used in international trade import export transactions. This type of payment method cannot be modified or canceled by the buyer/customer. Any changes to terms outlined in the Letter Of Credit agreement has to be approved by both, the buyer (my customer as the importer) and the seller (my company as the exporter). The buyer's bank (where the Letter of Credit was issued) makes the payment to the seller/exporter given that the seller complied with all conditions listed in the Letter of Credit. The bank of course charges a fee since they are taking responsibility for insuring the payment.

As an exporter, I would use the Irrevocable Confirmed Letter of Credit from the buyer/customer to open another Letter Of Credit against it to pay the supplier/manufacturer and hence the term Back to Back Letter of Credit. Of course the original Letter of Credit has to be of a higher value than the second Letter of Credit that I use to pay the supplier because I have accounted in my proforma invoice the cost of goods, shipping, bank fees, and my profit. A note here that this method also serves as hiding the identity of the original supplier/manufacturer from the buyer/importer.

How did I go about locating a bank that my buyers have access to to use to open a letter of credit to my benefit and I would also have access to to open the Back to Back Letter of Credit to pay for the goods? I simply searched for banks that existed in my customers countries and that at the same time would have branches in the country I was doing business from. For example, if my customer/importer was in Saudi Arabia, we would use a bank that existed in Saudi Arabia and at the same time would have a branch somewhere in the USA.

This international trade payment/financing method worked very well for my business. I eliminated the risk of shipping goods and not getting paid and I was able to do business for orders that exceeded the amount of cash that I would have in my business account.

Where there complications using this import export payment financing method? Yes. If I (the exporter), or my customer (the importer), or the manufacturer (the supplier) need for any reason to change any of the terms (such as quantity, dates, etc) in any of the Letters of Credit (original one from the buyer or the second one I opened to buy the goods); then it would require amendment paper work between the involved parties and fees to be paid to the bank. With time, I learned to account for delays in shipping and possible changes and made sure that a buffer is accounted for from the beginning of providing my customer with my quotation.