It is not necessary that every MSME in India is capable of exporting their goods without any financial hassle, in fact, it is more likely that MSMEs in India may need external financial assistance to connect them to the global market, that’s why many financial institutions aid them. This aid is known as Export Finance.
Further, you will read-
What is Export finance?
Export finance refers to the financial help extended to the MSMEs to ship their products globally. It assists small and medium-sized businesses to grow universally by managing hard payment terms.
It also helps businesses release working capital from cross-border or domestic trade transactions that would otherwise be tied up in invoices or purchase orders (for up to 180 days).Banks and financial institutions provider extent factoring services to exporters where they buy the accounts receivable of the supplier or exporter at discount in exchange for immediate money.
Export finance or trade finance helps exporters financially who are willing to sell goods to international buyers. It results in fascinating more customers for the product followed by increased sales of the customers, and more profit from those sales.
The exporter may require short term, medium-term or long term finance depending upon the type of commodities being exported. There exist different types of trade finance companies and trade finance institutions depending on the business needs and the nature of the export transaction. Export finance basically provides exporter financial support from manufacturing, production of goods to delivery of goods to the buyer. These facilities are provided using factoring and export factoring to import-export business by trade finance providers.
However, if the buyer is offering conventional repayment terms (usually, within a time period after the goods are received by the buyer), exporters can face lengthy trade cycles and financial uncertainty. So here export invoice finance can be used to advance payment to exporters by a trade financier to ease cash flow pressures. It can be considered as a loan for exporter for accomplishing various tasks involved in the export of goods. Apart from this, there exist various methods of payment in international trade such as letter of credit, cash in advance, documentary collections and open account.
There exist various finance companies which offer financial guarantees and bridge the finance gap from seller to buyer as well as establish trust amongst them. Export finance helps to reduce cash flow problems with payment guarantees from a customer when goods are being exported, advance payments for access to additional working capital and the discounting of customer invoices to avoid payment delays.
Types of export finance
- 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
Above mentioned are the types of export finance available within the international trade finance. All these together make it possible for the exporter to get finance at each and every level whenever needed by them. This finance ensures that exporters don't have to go through financial crises. Various risks within exports are covered by trade finance which results in betterment of both supplier and buyer.
See How it works.
Pre Shipment Export Finance
It is provided to the exporter when they ask for a certain amount of payment for arranging various necessary things such as raw materials. This finance is needed for processing raw material into finished goods. Once the processing is done they have to be stored at relevant places and for that some cost has to be paid. Also for packing and shipment of goods to the port finance is needed. Exporter can apply for this finance once order is confirmed by the buyer and its proof have to be shown in the finance institution for further processing. It is granted for 180 days. If some kind of uncertainty occurs then this can be extended to 90 days. Maximum allowable period is 270 days. Read More...
Post Shipment Export Finance
Post shipment finance is a kind of loan granted by a financial institution to an exporter or seller against a shipment that has been already made.
Once the shipment of goods towards importer is done the exporter is supposed to make a bill that has to be paid by the importer. It’s a lengthy process and takes almost 3 to 6 months to receive the payment from the importer and meanwhile, production of exporter can get affected. So to avoid this exporter presents this bill in the financial institution which will pay for the wages and other services such as shipping charges. Post shipment credit is basically to help the exporter financially till a payment from importer is received. So the production and other work keep ongoing. Read More...
Export finance against the collection of bills
The finance can be obtained by the supplier/exporter on the basis of bills of purchase made by the importer. If in case any default occurs, the finance institution has to compensate almost 80% of the default amount. It can be considered as post shipment finance.
Export finance against allowances and subsidies
If uncertain circumstances occur then there is an unexpected rise in expenditure that might be due to national and international changes, the government has to provide allowances or subsidies for export of commodities that too at reduced price to the importer.
Why Export Finance
In order to decide how to source export finance, first you have to identify exactly why 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.
Export terms of trade:
Export factoring
In trade finance between a buyer and a seller, after the shipment of goods, the seller raises an invoice to receive payment from the buyer. However, since the seller might not get his payments for up to 180 days post raising the invoice, through export factoring, the seller has the option to sell the invoice to a financier – or factor – and receive the payment instantly. Export factoring refers to the financial process, which includes purchase, funding, management and collection of short term accounts receivable based on goods and services provided to foreign buyers. It is a complete financial conglomeration encompassing credit protection, export working capital financing, foreign accounts receivable bookkeeping and collection services. Read More...
Invoice factoring
Invoice factoring, also referred to as factoring or debt factoring, is a type of debtor finance where a business sells its accounts receivable – or invoice – to a third party (called a factor) at a discount. In this type of financial transaction, the factoring company usually pays out two installments for an invoice – an advance of 80 per cent of the invoice in the first installment and the remaining 20 per cent, excluding the fees included, after the entire amount of the invoice is paid. In other words, through invoice factoring, the factoring company buys an invoice from a business for a percentage of the entire value and takes responsibility of collecting the payment for the invoice. Businesses usually consider invoice factoring to meet its immediate cash needs or to reduce credit risk. Read more...
Cash in advance
Cash advance – a type of trade finance based on trust – is an advance payment of funds before the shipment of goods, to help the exporter in manufacturing and production of goods following an order. Such methods of payments are used to do away with the seller’s credit risk or risk of non-payment and are mostly opted in transactions in which there is a delay between the sales agreement and the sales delivery. However, though being beneficial to the seller, cash in advance payment enhances risks for the buyer, in cases where the seller is not highly credible. The most common use of cash in advance is witnessed in online marketplaces and international trade.
Open account
Open account is a payment term in which an exporter ships and delivers the goods to the importer and also allows the availability of documents controlling possession rights to the goods, even before the payment from the importer is due. The importer or the buyer, instead, promises to extend the payment to the exporter or seller within a predetermined number of days. The open account payments are at risks to the sellers and due to the increasing competition in the export market, exporters reluctant to extend credits are open to losing their sales to their competitors. However, buyers often accommodate the comfort levels of the sellers through standby letters of credit in favor of sellers. Read More...
Documentary collections
The documentary collection refers to the financial transaction in which the exporters receive payment for shipped goods in exchange of shipping documents channeled through their respective banks. In such methods of transactions, the exporter’s bank acts as the collection agent and collects funds from the importers bank by sending documents of the goods being shipped to the importer by the exporter. Documentary collection can be of two types based on when the payment is made. In case of documents against payment, importers pay the face amount of the draft at sight and in document against acceptance, importers makes payment on a specified date in the future. Read More...
Letter of credit
A Letter of Credit (LC) or the Credit Letter is a letter issued by financial institutions – like banks – to guarantee on time payment of the correct amount from the buyer to the seller; and in cases where the buyer fails to make the payment of the purchase on time, the bank stands liable to pay the entire or the remaining amount of the purchase. Letter of credit becomes a key option of financial transaction in international trade due to several factors like distance, differing laws in each country, and difficulty in knowing each party. The bank issuing the letter of credit usually charges the beneficiary with a service fee, which is usually a percentage of the total size of the credit. Read More...
Advantages of export finance
The financial support required by an export business for purchasing, processing, manufacturing, packing and exporting of goods to overseas countries refers to as the export finance. One of the major advantages of export finance is that it is a relatively easy way to avail necessary short term finance and helps the business to focus on its steady growth with uninterrupted cash flow. Through export finance exporters are benefitted as they receive payments upon shipment or commissioning and need not tie up any asset. For importers, it acts like a long-term financing to match expected revenues with expenditures; thereby maintaining steady cash flow.
