Export Factoring

What Is Export Financing Line Of Credit In India

7/31/2023

Blog Post

Exporting is essential to a country's economic development, and Indian companies have been aggressively engaging in foreign trade to broaden their customer bases and boost profits. However, entering overseas markets has its own set of difficulties, one of which is obtaining sufficient financial backing for efficient export operations. Here, export financing is essential in assisting Indian exporters. We will examine the idea of an export financing line of credit in India in this blog, looking at its sorts, workings, and advantages, especially for small and medium-sized businesses (SMEs).

Export Financing Line of Credit Explained

A specialized type of financial aid given to exporters to support their activity in international trade is known as export finance. It makes sure that exporters have access to enough money to cover their pre- and post-shipment needs. A pre-approved credit limit is given to exporters by financial institutions, such as banks or export credit agencies, and is referred to as an export financing method (also known as an export credit line). Based on the quantity and value of their export orders, this credit line enables exporters to draw money as and when they're required.

Types of Export Financing Line of Credit Available in India

Mentioned below are the types of export financing line of credit available in India-

  • Pre-shipment Export Credit

Exporters are given pre-shipment export credit to fund a variety of tasks that need to be completed before the shipment of goods. These tasks could involve obtaining raw materials, producing items, packaging, and shipping to the port. Financial institutions offer this type of credit to ensure exporters can fulfill their export orders promptly.

  • Post-shipment Export Credit

Post-shipment export credit is provided to exporters after the shipment of goods. It covers the period from the shipment of goods until the realization of export proceeds. Exporters can utilize this credit to manage their working capital needs and bridge the gap between shipment and payment receipt.

  • Export Credit in Foreign Currency

Some financial institutions provide export credit in foreign currencies as protection for exporters against exchange rate changes. Particularly when the exporter's income is received in a foreign currency, this kind of credit aids exporters in preventing losses owing to unfavorable exchange rate changes

Export Financing for SMEs in India

Small and medium-sized businesses (SMEs) have a substantial impact on India's export growth, helping to support economic growth and the creation of jobs. However, SMEs often face challenges in accessing finance due to their limited scale and resources. Export credit options tailored for SMEs can help them overcome these hurdles and tap into international markets. Some key export financing methods for SMEs in India include:

  • Export Factoring

Export factoring is a financing technique where an exporter sells its accounts receivable (invoices) to a financial institution (factor) at a discount. The factor then assumes the responsibility of collecting payments from the importer. This provides immediate cash flow to the SME exporter and minimizes the risk of non-payment.

  • Export Credit Insurance

Export credit insurance is a risk mitigation tool that protects SME exporters against non-payment or payment delays by their foreign buyers. With this insurance, SMEs can confidently explore new markets, knowing that their export receivables are covered in case of a buyer default.

  • Working Capital Loans for Exporters

SME exporters can also avail of working capital loans from financial institutions to meet their day-to-day operational expenses. These loans can be customized based on the exporter's specific needs, ensuring adequate liquidity for smooth export operations.

Benefits of Export Financing Line of Credit

Export financing, especially through an Export Credit Line, offers several advantages to Indian exporters:

  • Enhanced Cash Flow Management

Exporters can access funds on an as-needed basis, allowing them to optimize cash flow and manage working capital efficiently. This flexibility is especially beneficial when there are fluctuations in export orders and receipts.

  • Risk Mitigation

By utilizing export credit insurance and factoring services, SMEs can safeguard themselves against payment defaults and non-payment risks, reducing financial vulnerabilities.

  • Expansion of Market Reach

Access to export financing enables SMEs to explore new markets and take advantage of emerging business opportunities, thereby expanding their reach globally.

  • Competitive Advantage

Having a pre-approved Export Financing Line of Credit gives exporters a competitive edge by showcasing their financial stability and readiness to fulfill export commitments.

Export Financing in India

Government Support Recognizing the importance of export financing for the growth of the country's export sector, the Indian government has taken several initiatives to support exporters:

  • Interest Subvention Scheme

Under this scheme, the government provides interest rate subsidies on pre-shipment and post-shipment export credit for select sectors, which helps reduce the cost of credit for exporters.

  • Export Credit Guarantee Corporation (ECGC)

ECGC provides export credit insurance to protect exporters against payment risks in foreign markets. SMEs can benefit from this insurance to minimize their credit risk exposure.

  • Export Promotion Schemes

The Merchandise Export from India Scheme (MEIS) and the Services Export from India Scheme (SEIS), among other export promotion programmes, provide incentives and financial support to qualified exporters, especially SMEs.

Conclusion

The growth and competitiveness of Indian exporters, especially SMEs, are greatly aided by export finance, notably through an export financing line of credit. By providing access to flexible and timely credit, risk mitigation tools, and government support, export financing empowers businesses to expand their market reach, fulfill export orders efficiently, and thrive in the global marketplace. As India continues to strengthen its position in international trade, export financing will remain a crucial component in sustaining and enhancing the country's export performance. SMEs, in particular, can leverage these financing options to unlock their export potential and contribute significantly to the nation's economic progress.

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Sachin Nigam

Sachin Nigam is the Director, Global Trade at KredX. He is a finance professional with over two decades of experience at some of the world’s most influential institutions like A.P. Moller - Maersk, CRISIL, HSBC, and ICICI Bank. You can connect with him on LinkedIn to know more.