Capital is essential for exporters, as it is for any other type of business, to keep up production and regular business operations. On the other hand, exporters may struggle to keep their operations going if they don’t have enough operating capital. Financing options like export financing can be helpful in these cases.
What is Export Financing?
This form of finance is for exports, as the name implies. Export financing is a type of financing whose primary objective is to assist financially enterprises that engage in overseas trade. The period it takes for an exporter to receive money from a buyer is typically a significant source of financial stress.
However, export finance service is a steady source of cash flow and aids in maintaining operations. The need for this loan could develop at any time during the working capital process for various reasons.
Export financing is available from various financial institutions, including banks, non-banks, and those focused on international commerce. India, for instance, can obtain export funding from the Export-Import Bank, state finance corporations, the Export Credit Guarantee Corporation, and the National Small Industries Corporation.
What are the Advantages of Using Export Financing?
Export financing in India is available to businesses throughout their life cycles. This type of finance is typically used before and after the cargo has been made.
This kind of financing is also helpful if export subsidies are cut off during the invoicing and payment phases of the working capital cycle. Companies typically use export financing because of the following factors:
- To initiate an export-oriented startup.
- As a means of encouraging enterprise growth
- As a means of securing adequate working capital
- So as not to disrupt manufacturing.
How Can I Get Export Financing?
Export financing works essentially the same way as invoice factoring. Through this financing choice, exporters can access funds based on the estimated future value of their invoices. Invoices owned by a foreign debtor can be used as collateral for an asset-based loan.
Follow the guidelines below to learn more about this type of financing:
- The exporter sells their wares to the buyer, also known as the importer.
- As soon as the importer approves the exporter’s invoice, the products are shipped out, and the buyer is given the option to pay cash on delivery.
- Exporters often sell the invoice to a banking institution for a fraction of its total value to maintain a steady cash flow.
- When the payment due date arrives, the financial institution is in charge of collecting payment from the consumer.
- After receiving payment, the exporter gets the remaining invoice amount minus a small processing fee.
Types of Export Finance
The five most common forms of export finance are as follows:
Pre-shipment Export Finance
When an exporter needs money before sending the items, they might turn to this financing. The borrowed money is typically spent on buying and processing raw materials, completing production, and packing the final product. Loan Against Property is a common option. However, there may be more suitable solutions for financing your export business due to its long-term nature and potential impact on your property ownership. The most reliable places to get pre-shipment export financing are:
- Packing credit
- Loan to Enterprise
Post-Shipment Export Financing
Sellers have to wait for payment after sending out invoices and shipping merchandise. The average time frame between shipment and payment is two weeks and three months. Post-shipment financing from these institutions allows sellers to meet their operational cash needs:
- Invoice discounting
- Factoring invoices
Export Financing Against Bill Collection
Credit from financial institutions is made available to exporters in exchange for bills sent to be collected from customers in foreign nations. When calculating the costs to finance the export bills, these financial institutions use the Free on Board (FOB) invoice rather than the CIF invoice. While not directly trading instruments, export finance involves trading strategies that manage risk and optimize cash flow throughout the international sales process. In the case of a default, the sponsoring company will be responsible for paying at least 80% of the default amount.
Export Credits With Deferred Payments
Deferred export financing falls into two categories:
- Purchaser Financing
- Supplier’s finances
Export Financing in Exchange for Tax Breaks and Other Benefits
To promote foreign trade, the government pays subsidies to exporters. Such offerings can take the form of cash compensation for controlling rising transportation costs or reductions in wages or duties to boost export volumes. Businesses engaging in international trade should choose an appropriate export finance option based on their needs and export strategy.
You can also obtain DGFT and Customs benefits for advance license filings by submitting the necessary paperwork to the Director General of Foreign Trade to get an Advance License. The potential rewards are high, explore expert “Investing Tips” before venturing into export finance to navigate the unique risks and opportunities. You can meet the needs for working capital with no effort if you apply for financing using the convenient online application.
Conclusion
Funds are the absolute backbone of any enterprise. You, as an exporter, can use money from your financing sources to pay for initial capital expenses. Naturally, you’ll have to come up with the money to prepare the business for production, whether for everyday working capital needs or surprises.
If an exporter needs money, they can get it from various export financing options, as mentioned above. You should choose a financing option that works for your export business and fits your long-term goals.
Author’s Bio:
Mr. Mehul Goyal is a professional DGFT Guru – Advance License with experience of more than 30 years and specialized in the field and is offering DGFT Consulting Services all over India. He is working with many importers and exporters even before DGFT was instigated in the markets.