Raw Material Imports in Apparel Manufacturing: A Financial Perspective
Introduction
The garments industry, particularly in export-driven countries like Bangladesh, relies heavily on importing raw materials such as fabric, yarn, accessories, and chemicals. Ensuring a smooth and cost-effective import mechanism is crucial for sustaining competitiveness in the global market. This article explores key aspects of importing raw materials for the garments sector, focusing on types of import LCs, funding mechanisms, account management, and payment settlement structures.
a) Types of Import LCs Applicable to the Garments Industry
Import Letters of Credit (LCs) are the most widely used instruments for sourcing raw materials. The major LC types used in the garments sector include:
Sight LC: Immediate payment is made upon document presentation. Suitable for essential inputs that need prompt delivery.
Usance LC (Deferred Payment): Payment is made after a specified period (30, 60, 90, or 120 days). This is common in garments as it provides breathing space for manufacturers.
Back-to-Back LC: Issued against a master export LC. This is frequently used in garments manufacturing to procure raw materials against confirmed export orders.
UPAS LC (Usance Payable at Sight): Combines deferred payment with sight settlement through bank financing. Offers better cash flow management.
Revolving LC: Used for continuous supply orders of the same goods, reducing administrative effort and time.
b) EDF Fund and Its Function
The Export Development Fund (EDF) is a refinancing facility provided by the Bangladesh Bank (or equivalent central bank in other countries) to support the import of raw materials for export-oriented industries.
Key Functions of EDF:
Provides low-interest foreign currency loans to importers of raw materials.
Helps reduce dependence on high-cost commercial foreign exchange sources.
Supports timely procurement, thus improving export performance.
Loan tenure usually extends up to 180 days, renewable under specific conditions.
c) Margin Account, Force Loan, and Past Due Bills
Margin Account:
Importers are typically required to deposit a margin (e.g., 10%–30%) when opening an LC, depending on their creditworthiness and bank policy.
It acts as a risk mitigation tool for banks and is adjusted once the bill is settled.
Force Loan:
When an importer fails to make payment on time under the LC arrangement, banks may convert the overdue amount into a Force Loan.
This is considered a temporary loan and accrues interest until repayment.
Past Due Bills:
Bills not paid within the stipulated maturity date under usance or sight terms become past due.
Accrued interest and penalties may apply, and frequent past dues impact the importer’s credit rating and banking facilities.
d) Open Account Imports: DA & DP Transactions
Open account imports are non-LC-based trade transactions and gaining popularity for their flexibility.
DA (Documents Against Acceptance):
The exporter ships goods and forwards documents through the bank. The importer accepts a time draft and promises to pay at maturity.
DP (Documents Against Payment):
The documents are released to the importer only after payment is made. Offers more control to the exporter than DA.
Note: Due to higher risk exposure, such methods are generally practiced with long-term, trusted suppliers or in countries with stable trade policies.
e) Payment Settlement under Import LC
Payment under an LC follows structured banking and documentation procedures:
Presentation of Shipping Documents: The supplier submits the Bill of Lading, Invoice, Packing List, and other required documents to the negotiating bank.
Document Examination: The issuing bank checks for compliance with LC terms.
Payment Authorization: Upon verification, the bank debits the importer’s account or offers financing through EDF or other credit lines.
Settlement: Funds are remitted to the exporter, and documents are released to the importer for goods clearance.
Settlement modes include:
Sight Payment
Deferred Payment
Bank Financing through Force Loan or EDF
Conclusion
A sound understanding of import financing tools, payment mechanisms, and regulatory requirements is essential for garment manufacturers to manage procurement efficiently and maintain their global competitiveness. Leveraging strategic LC structures and financial tools like EDF not only ensures raw material availability but also enhances financial liquidity and operational planning.
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