• Do You Really Need Export Finance? Yes - and Here's Why

    Export Finance

    From building your business establishment to executing your orders and meeting business contingencies, finance is required at every step of the way in the export business.

    A lot of capital expenditure may be required at the time of establishing a business. The purchase of infrastructure and machinery, leasing, renovations, etc. are typically incurred at the onset or during the expansion of a business. On the other hand, revenue expenditure is incurred to keep this enterprise in running condition.

    ‘Export finance’ refers to finance options availed of by exporters to process their export orders. The various financial requirements that may be needed at different stages of the export business cycle include pre-shipment finance, post-shipment finance, finance against subsidies and benefits, and deferred export finance (supplier finance and buyer finance).

    There are various export finance products and methods, and the important ones have been outlined below.

    Pre-shipment export finance

    Pre-shipment export finance can take many forms, commonly as packing credit. The different variations of the same are listed below:

    • Packing credit is offered to highly rated exporters by commercial banks based on their credit records. The exporters are expected to use this credit as an advance to suppliers from whom the raw materials or goods to be exported are procured. These are very short-term loans offered against minimal documentation.
    • Packing credit is also available in the form of hypothecation. Raw materials, semi-produced goods, or finished goods are purchased by the exporter under a hypothecation deed in favor of the bank. The possession of the goods remains with the exporter, but the goods are treated as a security against the loan.
    • Packing credit in the form of a pledge is another pre-shipment option. Under this arrangement, the documents relating to the purchased raw materials are pledged with the bank. It is suitable for goods that are seasonal or bought in bulk, with the delivery schedule spread over some time.
    • Secured shipping loans are short-term loans available for the period between the despatch of goods from the works/factory until the completion of customs and port formalities. It is availed of at the time of handover of the goods to the intermodal transporter or C&F agent and is available against the lorry or railway receipt.
    • Red Clause Letter of Credit advances can be obtained by an exporter if they request the importer to open a Red Clause Letter of Credit. This Letter of Credit (LC) authorizes local banks to allow an advance to the exporter with the guarantee of the issuing bank. Such advances are provided as working capital funds required to process the order.
    • Advance against cheque or draft can be availed of by an exporter if they receive a cheque or draft payment against an export deliverable. The exporter must be able to prove to the bank that the cheque is against overseas sales and must also have a good credit record.
    • Packing credit for consultancy services is the credit offered to allow consultancy firms to acquire manpower and train them. It is, therefore, a resource mobilization advance offered to the consulting service exporters.
    • Packing credit for deemed exports is given to exporters engaged in projects and programs secured through global tenders.
    • Pre-shipment credit is given in foreign currency to exporters to enable them to pay for imported inputs. These credits cannot exceed a tenure of 180 days and are to be used for imported inputs used in the manufacture of export products.

    Post-shipment export finance

    Post-shipment export finance is also available in various forms, including certain offerings by Drip Capital. These various options are listed below:

    • Bill negotiation under LC can be availed of by an exporter after submitting the required documents to the bank. The bank, on its part, sanctions an amount up to the maximum of the L/C amount, after liquidating pre-shipment finance, if availed of by the exporter.
    • Bill discounting can be used by the exporter even when the bill is not covered under L/C. Firms like Drip Capital are engaged in providing this post-shipment finance service to exporters with easy processing and competitive discounted charges.
    • Advance can also be availed of against bills sent for collection; this is a regular practice in certain lines of trade.
    • Advance against goods sent on a consignment basis can be availed after the sale of goods. The overseas branch of the exporter’s bank can adjust this advance against the proceeds once they are realized.
    • Advance against duty drawback can be used by exporters in case of drawbacks received via government incentives. These benefits are provided by the government after the sale of goods and receipt of the sale proceeds. These advances can be offered by banks as pre-shipment finance as well.
    • Advance against undrawn balance is applicable in case of businesses where the exporter doesn’t bill the buyer for the entire sale value. A portion of the invoice value is not drawn in anticipation of differences and adjustments in the final value.
    • Advance against retention money is applicable in the case of capital goods or construction projects. A portion of the project value is retained by the buyer until the contract is fulfilled, and banks provide an advance against this retained portion. Similar to this is advance against deferred payment.

    Other forms of finance

    Apart from the forms listed above, exporters can also avail of other financing options if needed:

    • Finance against subsidies and benefits refers to various cash benefits, subsidies, and duty drawback that an exporter is eligible for. Whether it’s a cash compensation offered by the government to cope with uncontrollable expenditure hikes or refund of import duty of inputs, it may take time for such benefits to be passed on to the exporter. Financial institutions offer finance against such future benefits.
    • Supplier finance is provided by the exporter’s bank to the exporter as the full value of the export. If sale proceeds are received by the buyer in installments, it will be received by the exporter’s bank.
    • Buyer finance can be beneficial for the exporter as well. The exporter’s bank provides an L/C to the buyer, thus enabling swifter sale receipts for the exporter.
    Raghav Khajuria
    Raghav Khajuria
    Leads Marketing activities for Drip Capital.
    6 min read