Although there is much you can obtain from within Australia, there comes a time when you need to go abroad for specialised equipment. Australia has a comparatively small population and is isolated geographically from the rest of the world, so it doesn’t always make sense for suppliers to hold stock for certain types of equipment that is manufactured overseas.
If you’re a business owner looking to purchase equipment internationally, there is the question of how to finance it. If you don’t have access to your own capital, it is important to find a finance provider that offers a workable solution for what can be an expensive and lengthy transaction.
Talk to your experienced finance broker, because there are finance options for purchasing new or used equipment from an overseas supplier. Take at look at the following scenario:
The Problem
A medium sized manufacturing business wished to purchase new equipment from overseas, but didn’t have the needed funds on hand. This equipment was needed to increase the amount of product and service they could provide to their customers.
They required AUD $ 800,000 to purchase this equipment. In this example, this funding needed to be paid to the supplier in EUROS.
Although all the directors within the company owned property, none of them were prepared to provide that property as security to raise the funds with their own banks. These properties were privately owned and used for individual investment purposes.
This left the company without the appropriate capital to make the purchase.
Therefore, they required a financing solution that would offer the following:
- Could be paid out in EUROS to the supplier
- Did not require property security from client
- Offered low repayments until the equipment was received and could start making money for them.
The Finance Solution: A Letter of Credit
An experienced finance broker was able to have the client pre-approved for the much needed equipment finance of $800K AUD.
With this approval, the finance broker arranged for the approving bank to organise overseas funding to the equipment supplier.
This means the finance provider engaged a finance provider in the country of origin to issue a Letter of Credit in EUROS. This Letter of Credit was issued to the equipment supplier.
The supplier was now able to access the funds in installments. These installments were paid out as required to finance the 4 month period of manufacturing the equipment.
The supplier was then able to finance the build of this equipment and the cost of shipping it to Australia.
Meanwhile, the company here in Australia paid interest only on the funds until the equipment arrived. It was similar to the financing of a house build in that the client only had to pay interest on the funds paid out at each stage, not the full amount.
How did a Letter of Credit meet the company’s needs?
- Because the finance provider holds on to the capital, and only pays out in the agreed installments, there is no need for property security.
- The finance provider dealt with the overseas supplier’s bank.
- The finance provider set up minimal fees for the Letter of Credit. Fees are usually calculated as being in the range of 0.5% of the Letter of Credit amount required in AUD, with a minimum Letter of Credit amount of $500K, plus SWIFT fee of $32 (Swift: international payment network fee), and an Indicative Trade Finance rate of 5.5% approximately. In this case, the fees equated to a total of $4,500.
- Low interest only payments until receipt of the equipment in Australia.
Upon conclusion of this transaction, this letter of credit facility was paid out via normal equipment financing, thus converting to a Chattel Mortgage/Specific Security Agreement, as if the equipment were financed and purchased within Australia.
The finance broker was able to facilitate this entire process with the finance provider on behalf of the client.
There were no further international obligations, and the company was able to move forward making repayments against the loan as per a normal domestic finance arrangement.
Why This Financing Option?
This financing option is a system that works for all parties involved in the transaction.
The Finance Provider: By establishing pre-approval for the loan in advance, the overseas division of your funding bank knows you are creditworthy, and would have successfully financed the purchase within Australia should it have been available to you.
The supplier: receives the funds as needed to manufacture and ship the equipment, and is therefore not out of pocket to finance the build.
The Business:
- You do not have to leverage your private property.
- You are committed to interest only payments until you receive your equipment.
- You don’t have to worry about paying for the equipment in full, without knowing if it has been or will ever be shipped.
This is an option that ensures both parties meet their end of the agreement. As these transactions usually take some time, from initial pre-approval application to the eventual receipt of equipment and pay out of the Letter of Credit, both you the purchaser and your overseas supplier need assurances the trade will go smoothly.
Discuss with your finance broker how a Letter of Credit will assist you in your next overseas equipment purchase.