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.