Case Study: Amir is a second generation carpet merchant from Pakistan. He was born and bred in Malaysia by his immigrant parent who came to settle in the country over 30years ago. The carpet business has been the anchor of their livelihood and provides a decent income for the family and jobs for other Pakistani immigrants who came to seek greener pastures in Malaysia.
It is fair to say that Amir Senior had toiled very hard over the years to grow his business from a humble beginning, selling off all he had in Pakistan to finance his new a carpet business in Malaysia. With the little he had, he was able to grow his business to become one of the top importers from Iran and other surrounding countries, which aimed him the rights of a major distributor to small retailers in Kuala Lumpur, Malaysia.
As Amir finished his business degree and ready to take over the family’s business, he was faced with two potential success paths in managing the trade. “I could either maintain the exiting supply chain from my old man and risk failure or build on his legacy and take the business to greater heights” he says. “But if I fail, that will bring shame to my family.”
The problem like many other businesses: it was running on a 30 days’ credit terms to the buyers (retailers) which means they have to wait till all the cash comes in before they can place new orders from Iran. And then wait for another 30 – 60day for production and shipment from suppliers.
“This impeded cash flow needed for other demands and growth was slow,” he added. At that time, it was a virtuous circle until he was introduced to structured trade finance. Amir nor his dad had never applied for finance or loan before.
Survey in Malaysia showed that in 2013, most immigrating families from neighboring countries often settle as full time self-employed in Malaysia and Singapore. If they are lucky enough to meet a good network of fellow countrymen and business association linked with some sort of internal funding, then they are off to a good start. Many of such businesses may not seek finance from the local banks due to lack credit lines and collateral for support. Yet you can see the presence of many foreign businesses around every corner in the commercial districts of Kuala Lumpur.
Most of them are not aware of the systems here and are totally ignorant of the available finance opportunities offered by banks and other private institutions says Andy Daniel, Marketing Director of Trade Finance Capital, Kuala Lumpur.
Amir’s business didn’t need loan but he wanted to grow and so Trade Finance Capital’s team immediately went to work by analyzing his business and transaction records. They studied his supply and contract performance history with the international suppliers. After due diligence the team identified 3 key areas that needed support and improvement in order for the business to grow: (1) increase his number of purchases per annum (2) increase his bottom line and (3) increase productivity.
Few viable option was presented to him but his main goal was achieved by the following key implementations:
- Trade Finance Capital structured Amir’s business which included analyzing his market, growth potential, investors risk and, negotiating with his Iranian supplier to accepting Deferred Letter of Credit as mode of payment.
- A revolving contract was agreed and a Deferred Letter of Credit worth USD350k, valid for 180 days, was issued via Citi Bank, Hong Kong towards the Iranian supplier’s bank for the delivery of the specified amount of Persian rugs to Amir’s company in Malaysia.
“Every 3 months his Iranian supplier would deliver Persian carpets worth USD 355,000 and Amir would then pay for it within 180 days,” say Mr. Andy Daniel. “He has the flexibility to pay when he wants, however he wants and automatically renew the contract again and again at the end of the term.”
Amir’s business is growing, he is able to extend more credit terms to his buyers and recently added 4 more retailers to his bottom line. With this extended trade facility on hand, he is now seeking to import more products from Oman and Morocco with less risk and most of all, he has sufficient cash flow to take care of other day to day running of his business.
However, there are also other import finance options suited for small to medium scale importers with no credit lines to explore if they want to grow their business rapidly such as:
Pre-Import Working Capital Finance: for importers to fund the purchase of materials, services, and labor to fulfill import sales contracts. Finance provided with-recourse basis against either a confirmed import order from a foreign supplier or to purchase goods, raw materials for subsequent manufacturing of final goods, warehousing, or to arrange for the transportation of goods.
Pre-Import working capital finance can fund up to 100% of overseas purchases; freight, duty and VAT included, all the way to the point where the local customer pays your invoice.
Accounts Receivable Factoring for Importers: provides for the purchase at discount of an Importer’s accounts receivable. A way for importers to fund cash flow by selling their receivables to a third party (a factor, or factoring company) at a discount. Account Receivable Factoring can be provided by independent finance providers, or by banks.
How it works
The importer enters into an agreement with the factoring company whereby the company will manage their sales ledger and credit control on an ongoing basis for a fixed period depending on the contract agreement (typically 24 months).
In return, the factoring company advances some funds upfront when the importer sends an invoice to a customer- typically 85%.
When the end customer comes to pay, the factoring company collects the debt and makes the remaining balance available to the importer, minus their fees.
For new importers and immigrants who lack a long business and credit history, these are some of the avenues for short-term funding.
If you enjoyed this special report and case study on how you can access funding and grow your business with structured trade finance, feel free to post your comments on this blog.
P.S Feel free to write down your comments below! If you prefer to send us an email instead, you can send it to firstname.lastname@example.org – we will definitely get back to you. Until then, please note that our website has viable large information on how you can go about financing your business to preserve precious working capital.