It is no exaggeration to say that finance is the lifeblood of any business. As an exporter, funds received through your financing channels may be used in the preliminary stage while incurring capital expenditures. You will, of course, need to find the funds needed to make the business production-ready for day-to-day working capital requirements or to meet unforeseen contingencies.
There are different sources of export finance for exporters to meet their requirements for capital. It is up to you to select a source of finance suitable for your needs, ensuring that it fits the long-term strategy for financing your export business.
What is Export Finance?
Unlike domestic trade transactions, International trade is much more tricky, it involves various stakeholders including, but not limited to, freight forwarders, shipping lines, customs agents and freight forwarders.
Additionally, there are several formalities and processes involved in a typical export transactions and since the goods are already produced and dispatched at an exporter's end, the investment towards that transaction is already committed and can cause serious cash-flow problems for an exporter till he or she gets paid for the transaction.
Conversely, in several instances, importers may also make advance-payments (to the exporter) for a given product and the importer will have to wait till he or she can take possession of the goods before selling it further in the domestic market.
Export finance is the branch in finance that specifically helps address these cash flow probles that are unique to exporters.
Why is Export Finance Required?
In simple words, companies avail export finance for one simple reason - to accellerate business growth. Having huge portion of working capital stuck in the previous production order will result in an exporter being unable to make the first investment into the next batch of raw materials or finished product, thus retarding the growth process even further.
Export finance products like pre shipment or packing credit or post shipment finance solutions generally solve these problems by unlocking critical finances for the exporter which enables him or her to scale their business faster in exchange for a small fee.
To set up a new Export Business
For building a new export business, you will require financial support. Whether you plan to acquire existing businesses like manufacturing units, renovate and modernize your business units, or expand/improve your plants and equipment so that you are ready to target the international marketing, financing requirements will always be a consideration.
For Business Expansion
At other times, the growth of your export business may require you to tap additional funds, for which you may have to arrange for large-scale finance. For example, say you decide to expand into a new export market, or set up additional offices to cater to new export lines.
For Working Capital
Often, business development and daily operations will constitute your biggest requirements for finance, also known an working capitaL. To accept new business, you need funds to accommodate the buyer’s credit period, accessible through loan products like pre shipment finance. There may also be a working capital requirement to arrange for inventory at times. Having enough cash enables you to compete in the market and muster the financial clout to take up new ventures.
When Do You Need Export Finance?
As discussed earlier, as an exporter, you may need export finance at various stages of your business cycle, including:
Finance against collection of invoices and at multiple stages of the working capital cycle
Finance needed in case of the suspension or removal of export subsidies and benefits
Types of Export Finance & Popular Export Finance Products
Depending on your requirements, there are various forms of financing available for exporters, from long term and short term loans to additional credit lines. Below are some of the more common tools you can use to finance your export operations.
Pre Shipment Finance
Pre Shipment finance is provided when an exporter needs funds before the shipment of products or goods. Funds are required for purchasing raw materials, processing of raw materials into finished goods, packaging goods etc.
Packing Credit : You can avail pre-shipment finance from your financier against an export order received from the importer in the form of Packing Credit. Once the funds are received from the overseas buyer, the concerned export packing credit amount willbe adjusted and loan will be closed against that order.
Business Loan : You can utilize a loan to purchase raw materials or to undertake the manufacturing of your product.
Post Shipment Finance
After you have shipped the products and raised an invoice from the importer, you will have to see through the credit period until you receive payment from your buyer. You may need working capital for this period to fulfill other orders. This can be resolved with post shipment finance from the following sources:
- Bill Discounting and Invoice Factoring : You can approach your bank or a financial institution and present your invoice to them for faster liquidation. The banker or the financial institution could purchase, collect, or even discount the bill.
Bill discounting and factoring are quite similar with a few key differences.
- For example with an Invoice Factoring Solution you can submit your invoice along with certain other documents to Drip Capital or any other leading factoring companiesin India, some of these companies including Drip Capital advance up to 80% of the invoice value within 24 hours. On maturity of the invoice, the importer pays Drip Capital, who then settles the remaining amount after accounting for the agreed-upon fee. Factoring also includes the entire trade debts of a client,
A bill discounting solution, on the other hand includes trade debts that are supported by account receivables that are unique to that particular transaction.
Why Choose Drip Capital?
Export finance against the collection of bills : Banks generally agree to finance export bills which are repaid by guaranteeing companies in case of default. These lenders provide financial support of around 90% of the FOB (freight-on-board) value of the export.
Letter of Credit Discounting : Banks are often ready to finance against Letter of Credit (LC) as there is an inborn security in an confirmed LC that the issuing bank will make the payment in case of default.
Supplier's Credit & Buyer's Credit : There are also two distinct forms of financing you can tap - supplier’s credit, where the exporter’s bank finances the exporter with the full amount of the invoice while the importer can make payment in instalments to the exporter’s banker; and buyer’s credit, where the importer is given credit under the line of credit by your banker, thus facilitating your export transaction.
Export Finance Benefits from Government
Apart from these sources, the government can also be an important source of finance for you, through export benefits that you stand to earn. Financial assistance by the government and its agencies includes measures like an advance authorization scheme which waives import duty if the goods are used as inputs for export products; duty drawback schemes which refund duties and taxes paid for inputs to exporters; for electronic products, a zero-duty export promotion capital goods scheme available on the import of capital goods; and, the post-export EPCG Duty Credit Scrip Scheme which enables exporters to claim a refund on duties paid to customs officials.
Once you figure out why you need the funds and where you plan to use them, you can choose the financing that fits your requirements best and apply for it. These finance products are available from a variety of financial institutions, including banks, NBFCs, factoring companies, etc.
How Much Does Export Credit Cost?
The costing for receiving export finance can vary wildly as almost all financiers have set criteria to evaluate business continuity & risk profile for the particular client.
That being said, the rise of Fintech in India has allowed newer entrants like Drip Capital to come up with pretty competitive offerrings that make traditional lenders fairly reduntant in the export financing scenario.
However, some financial products, like a simple business loan is probably best availed by a traditional bank for safety and cost optimizing purposes.
In recent times, companies focusing on trade finance, like Drip Capital, have been partnering with larger banks to leverage their resources and provide a much more holistic product to the international traders.
Who Can Provide Export Finance in India?
There are different banks, non-banking financial corporations, and foreign trade-specific lenders that offer financial assistance to exporters like you.
The Export-Import (Exim) Bank of India provides buyer’s credit, corporate banking products, lines of credit, project-based finance, etc.
Banks, including nationalized banks, private sector banks, foreign banks, regional rural banks, certain cooperative banks, etc. all provide financing. Their services may include pre-shipment or post-shipment finance, lines of credit, foreign currency loans, advances against bills sent on collection/deemed exports/undrawn balance, etc. Of course, not all banks/branches may offer export specific products – be sure to study your bank’s offerings thoroughly before going ahead.
Non-banking financial institutions can also offer one or more export-specific financial services like bill discounting, factoring, working capital loan, buyer loan, lines of credit, etc.
How Export Promotion Councils help with Export Finance?
Export Promotion Councils encourage exporters, both old and new, to attend a variety of workshops that they conduct throughout the year. These workshops address topics like documentation, understanding of commercial terms, designing business plans, and understanding finances. These are excellent platforms for exporters to find solutions and advice on their business and financial needs. One-to-one correspondence with the EPCs to seek financial guidance is also an option.
Claiming Export Finance Incentives
Apart from arranging for finance from external sources, you should also claim the export incentives you are owed for your export operations. Let’s take the example of Duty Drawback Scheme.
The process of claiming a duty drawback on export goods starts at the time of export, with necessary particulars filled in the prescribed format of the Shipping Bill/ Bill of Export under drawback. In case of manual processing, the exporter is required to submit a separate application for claiming duty drawback. However, where the document processing is automated, no separate application is required. The triplicate copy of the shipping bill itself becomes the application after the Export General Manifest is filed.
Fig. 1: A snapshot of the Format for claiming duty drawback
With a well-rounded approach – which includes your specific needs, correct timing of application, the right choice of finance that suits you, and identification of the appropriate source of finance – you can obtain and utilize your funds in the best possible manner and ensure the growth and stability of your export business.
Always keep an eye on foreign exchange rates and terms while entering into a financing agreement.
Financing always comes at a cost – consider the impact of the cost on your profitability and bottom line.
Outsourcing collection against invoices to a third party can release you from the burden of an additional activity. Consider appropriate and trusted outlets that can take on this responsibility for you.
Don’t apply for finance beyond your repayment capacity – defaults will erode your credibility for future financing purposes.
Don’t undertake export orders if their completion is not feasible from a financial standpoint. You may either fail to arrange for the necessary finance or find it available only at exorbitant costs. It is always advisable to undertake export operations within your financial means.
Government benefits are subject to various terms and conditions – be sure to check the terms and conditions thoroughly. For example, your product may not qualify under a scheme, or the scheme may be applicable only for certain selected markets. Avoid unpleasant surprises later.
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