Export finance

Export finance

The financial support extended by institutions – like banks – to businesses for transactions during overseas shipment of goods refers to the export finance. Export finance is the credit facility or technique of payment at the pre-shipment and post-shipment stages and helps making financial process of purchasing, processing manufacturing or packing of goods more comprehensible.

This type of trade finance is provided by banks which are members of the Foreign Exchange Dealers Association (FEDA) and 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).

Export finance can be categorized into:

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 Pre-shipment finance – Pre-shipment finance is the finance required by an exporter before the shipment of goods. Pre-shipment finance provides the exporter with working capital required for funding of wages, production cost, buying raw materials, processing and converting into finished goods and packaging. Pre-shipment finance is extended under the concessional rates of interest at 7.5 per cent, to a maximum period of six months.

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Post-shipment finance: Post-shipment finance refers to the finance extended after the shipment of goods. In this type of export finance, the financer advances the payment, post shipment, to gain liquidity between shipping the goods and receiving payment. It mostly bridges the gap between the date of extending the credits after the shipment of goods to the date of realization of the export proceeds. Post-shipment finance is extended under the concessional rates of interest at 8.65 per cent, to a maximum period of six months.

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Supply chain – The technology-based financing procedure which links various parties in a transaction – such as buyer, seller, financer – for lower cost and better efficiency, is known as Supply chain finance or supplier finance or reverse factoring. It optimizes working capital for both the buyer and the seller by providing short-term credits.

Why Export Finance

In order to decide how to source export finance, first you have to identify why exactly you need these export finance funds. There are a number of reasons why as a trader you may need investments:

 To set up a new Export Business

Financial support is required for building a new export business. Whether you are planning  to acquire an existing businesses such as manufacturing units, or to modernize your business units, or  you are planning to expand and improve your existing plants and equipment so that you can effectively target the international market, funds and financing requirements will always have to be taken into consideration.

For Business Expansion

For the actual growth and expansion of your export business you will require access to some additional funds, for which you might need to arrange for large-scale finance.

For Working Capital

Daily business operations along with business development usually constitute of biggest requirements for finance, also termed as working capital. In order to grow and accept new business, there exists need to funds for accommodating the importer’s/buyer’s credit period, which can be accessible using some loan products such as pre shipment finance. In addition, working capital is also required for arranging inventory at times. Having access to enough cash or funds can enable you to compete in the international trade market.