Invoice Finance

Invoice Finance

When a finance provider extends a short-term loan to a borrower, based on unpaid invoices, the process refers to invoice financing. In this type of financing, a company meets its short-term liquidity needs based on the generated invoices, which the customer hasn’t paid for. With invoice financing companies are benefited in improving cash flow, paying employees and suppliers and reinvesting in operations much before if they had to wait for the customers to pay the complete balance. However, the company receives the specific amount, but after a few days, since the unpaid invoices acts as an accounts receivable.

It also supports in solving certain problems like customers taking longer to pay or difficulties in getting other business credits. Companies mostly opt to go for invoice financing to pay for their business activities at times when they are going through a liquidity crunch.

Companies can gain up to three times more cash by invoice financing than the traditional ways of funding and with the business turnover the borrowing power also gets improved. Though by advancing the entire invoice amount, companies limits it risk, still the risk never completely gets eliminated as the customer might actually not pay the invoice – and such cases involve difficult and expensive collection process and will involve both the bank and the business.

Invoice financing is commonly structured through:

●        Invoice factoring

●        Invoice discounting

Invoice financing mostly works in the following manner:

●        Companies give product to the customer and make an invoice

●        The invoice details are sent to the finance provider

●        Companies pay up to 90 per cent of the invoice’s face value – usually within 48 hours

●        Products are shipped and the customers make payment after receiving the products

●        After the payments are received, the remaining value of the invoice will be paid – less a service fee

Invoice financing includes the following key features:

●        High value financing: All the creditors get paid and the company is still able to manage the cash flow.

●        Fast and transparent: The process being entirely paperless helps in speedy receiving of finance

●        No collateral required: No valuable assets are taken as security by the finance provider.

●        Flexible repayments: Companies can avail convenient repayment tenors on business invoices till the debtor makes the complete payment.

Advantages of invoice finance:

●        More flexible than business loans or other finance methods

●        Decisions to lend becomes faster against invoices

●        Funding rises along with the total turnover of the company

●        Greater level of borrowing against unpaid invoices

●        Reduces late payment risks

Disadvantages of invoice finance

●        Invoice finance solves only a specific problem and is unnecessary if a customers pay invoices on time and within the payment terms.

●        If the debtor fails to pay the invoices, finance providers will directly deal with it and the relationship between the company and the customer might get affected.

●        The invoice financing is not available if products are sold to the general public

Trade Finance Solutions

Trade Finance

To reduce the risks related to international trade transactions, global trade flows are supported by the trade finance. To help importers and exporters in trade transactions, trade finance constitutes of instruments and products, which companies use for international trade and commerce. It has been reviewing the global trade and export finance market since 1983.

Trade finance brings down the payment risks of importers and exporters by introducing a third-party to business transactions. The exporters get receivables or payments, as per the agreement; on the other hand, importers receive credits to fulfill the trade order. Trade finance is mostly availed to ensure protection against the unique inherent international trade risks – like currency fluctuation, political instability, non-payment issues, credit-worthiness of any party involved in the trade and others.

Key documents required in trade finance are:

•                    Bill of exchange

•                    Promissory note

•                    Packing list

•                    Airway bill

•                    Commercial invoice

Institutions of trade finance are:

•                    EXIM Bank

•                    ECGC – Export Credit Guarantee Corporation of India

•                    Development Banks such as IDBI, ICICI

•                    National Small Industries Corporation

•                    Commercial Banks

•                    State Finance Corporations

The major parties involved in trade finance include banks, companies, exporters, importers, insurers, credit agencies and service providers.

However, the two major players are:

●        Exporters: Receiving funds to finance their consignment

●        Importers: Ensuring payments for the quality and quantity of the goods

Import finance

Import finance bridges the gap between receiving the goods and transferring of the payment. It is usually referred to as a short-term finance provided by a third party for the import of goods into an overseas country. With the subsequent increase in international trade, whenever a business faces difficulty in trading overseas alone, import finance becomes the key mode of financing. It has also encouraged several traders to take up to international trade and globalize their businesses.

Major requirements in import finance are:

•                    Beneficiary’s audited financial statement

•                    Complete business plan

•                    Expected financial cash-flow

•                    Credit reports

•                    Company’s directors’ details

•                    Company’s liabilities’ detail

Import finance can be of several types including usance/standby letter of credit, bank guarantees, invoice finance, asset-backed facilities and others. Documents required to secure import finance are invoices, bills of exchange, promissory note, bill of lading, letter of credit and other specific ones.

Export finance

Export finance is the financial help required by an export business for purchasing, processing, manufacturing, packing and exporting of goods to overseas countries. It is generally the credit facilities or techniques of payments at the pre-shipment and post-shipment stages.

Export finance is exclusively provided by commercial banks, which are members of the Foreign Exchange Dealers Association. In India, the refinance facilities to the commercial banks in India are issued by the Reserve Bank of India (RBI) and the Industrial Development Bank of India (IDBI).

Depending on the type of trade, export finance can be provided to the exporters as short term, medium term or long-term finance. In the out turn of globalization and the subsequent increase of competition and efficiency, varied types of trade finance companies and trade finance institutions have emerged depending on the business needs and the nature of export transaction.

Export finance is majorly categorized into pre-shipment finance and post-shipment finance. Pre-shipment finance is the finance required to help exporters with working capital finance to fund wages, production cost, raw materials, processing and converting into finished goods and packaging, after buyers confirms the order – mostly through Letter of Credit.

Export Finance

The financial help required by an export business for purchasing, processing, manufacturing, packing and exporting of goods to overseas countries is called export finance. It is the credit facilities or techniques of payments at the pre-shipment and post-shipment stages.

By handling hard payment terms, export finance makes cross-border transactions simpler; thereby helping businesses in releasing work capital and helping small and medium-sized businesses grow globally.

Export finance is exclusively provided by commercial banks, which are members of the Foreign Exchange Dealers Association and in India, the refinance facilities to the commercial banks in India are issued by the Reserve Bank of India (RBI) and the Industrial Development Bank of India (IDBI).

The type of loan requested by an exporter can be short term, medium term or long term, depending on the product being exported. In the out turn of globalization and the subsequent increase of competition and efficiency, varied types of trade finance companies and trade finance institutions have emerged depending on the business needs and the nature of export transaction. Moreover, there are several methods of payment in international trade like letter of credit, cash in advance, documentary collections, open account and others.

Export finance can be categorized into:

●       Pre- shipment export finance (180-270 days)

●       Post shipment export finance (180 days)

●       Export finance against the collection of bills

●       Export finance against allowances and subsidies

Pre-shipment Export Finance

Pre-shipment finance is the finance required to help exporters with capital finance to fund wages, production cost, buying raw materials, processing and converting into finished goods and packaging, after buyers confirms the order – mostly through Letter of Credit. In simpler words, it is the finance required by an exporter before the shipment of goods.

Pre-shipment export finance is granted for 180 days and can be extended to another 90 days in case of uncertainties. It is granted by the banks under the concessional rates of interest at 7.5 per cent. Exporters can access pre-shipment finance through receivable-backed financing, inventory/warehouse financing and prepayment financing.

Benefits:

●        Purchasing of raw materials for manufacturing

●        Storage of goods at warehouses

●        Packing, marketing and labeling of goods

●        Pre-shipment inspection charges

●        Purchase of heavy machinery and other capital goods from domestic market

●        Processing goods

Post-shipment export finance

The payment advanced by a financer gain enough liquidity between shipping the goods and receiving the payment refers to the post-shipment export finance. It is extended after the shipment of goods, to meet the requirement of the working capital. Post-shipment export finances are granted under the rate of interest of 8.65 per cent for a period of 180 days – which can be extended to 90 more days in uncertain cases.

The key payments generally covered by the post-shipment finance are:

•                    Agents/distributors

•                    Publicity and advertising in overseas market

•                    Post authorities, customs and shipping agents

•                    Export Credit Guarantee Corporation of India Ltd (ECGC)

•                    Overseas visits for market surveys

•                    Marine insurance premium, under CIF contract

Export finance against the collection of bills

The finance obtained by the exporter on the basis of the importer’s bills of purchase is called the export finance against the collection of bills. Financial institutions are liable to cover up to 80% of compensation in case any default occurs.

Export finance against allowances and subsidies

Government provides allowances or subsidies to importers for export commodities at reduced rate if there is an unexpected rise in expenditure, which may be due to national and international changes.

However, considering the fact that the export finance is exposed to more risks than most other businesses, in India, Export Credit and Guarantee Corporation (ECGC) has been formed to provide assistance in the form of insurance cover and guarantee.