Export Finance

Like every other business entity, exporters depend heavily on capital to maintain their production and every day operational activities. However, exporters may sometimes find it challenging to sustain their business activities due to the lack of working capital. In such a situation, they may often find export financing as a suitable financing solution. Read more

What Is Export Finance?

Export finance / trade finance helps to cover the immediate expenses and allows providing competitive terms of payment. Export finance also helps to mitigate some financial risk involved with international trade.

Nevertheless, export financing service functions as a reliable source of cash flow and helps to keep operations active. It must be noted that the purpose of availing this loan may arise due to several requirements that may occur throughout the working capital stages.

Typically, banking and non-banking institutions and foreign-trade based lending institutions can provide export finance to exporters. For example, in India institutions like Export-Import bank, developmental banks like ICICI, IDBI, etc., National Small Industries Corporation, Export Credit Guarantee Corporation and State Finance Corporations serve as sources of export financing.

Why Should One Choose Export Finance?

Typically, exporters can opt for export financing in India at various stages of their business cycle to meet the requirements. Most businesses resort to this financing option during the pre-shipment and post-shipment phases.

Also, this funding option proves useful in case of suspension of export subsidies and collection of invoices throughout the working capital cycle. In general, businesses opt for export finance for these following reasons –

  • To start a new export-based business
  • For business expansion
  • To meet the working capital requirement
  • To keep production undisturbed

How Does Export Financing Work?

The fundamental functioning of export finance is similar to invoice factoring. Under the funding option, exporters can raise capital against the value of their outstanding bills.

In this asset-based financing, the invoices held by a foreign debtor are treated as a security to avail a cash advance.

The pointers mentioned below highlight how this financing works –

  • A customer or importer purchases goods from an exporter.
  • The exporter then raises an invoice from the importer and allows the customer to pay for the item on receipt and ships the goods.
  • To keep the cash flowing, exporters sell the invoice to a financial institution in exchange for a significant share of the invoice value.
  • The financial institution takes over the responsibility to collect payment from the customer on the due date.
  • Once payment is collected, the remaining invoice amount is transferred to the exporter after deducting a nominal fee.

Types of Export Finance:

There are 5 major types of export financing

  • Pre-Shipment Export Finance

    This type of finance is accessed when an exporter requires funds before goods are shipped. Typically, the fund availed is used to purchase and process raw materials, packaging finished product, etc. The best sources of pre-shipment export finance include -

    • Packaging credit
    • Business loan
  • Post-Shipment Export Finance

    Once the products are shipped, and an invoice is raised, sellers have to wait until the products reach the buyers to receive payment. Typically, the gap between shipment and receipt of payment ranges between 1 month and 3 months. Sellers can cater to their working capital needs through post-shipment finance via these sources –

    • Invoice discounting
    • Invoice factoring
  • Export Finance Against Collection Of Bills

    In a situation where goods are exported to different countries, exporters can avail credit from banking institutions against the bills sent for collection. These financial institutions factor in Free on Board (FOB) invoice instead of CIF invoice to finance the export bills in question.

    It must be noted that in case of non-payment, the guaranteeing company will have to compensate a minimum of 80% of the default amount.

  • Deferred Export Finance

    There are 2 main types of deferred export finance, namely –

    • Buyer’s finance
    • Supplier’s finance
  • Export Finance Against Allowances And Subsidies

    The government provides subsidies to exporters in order to encourage international trade. Some examples of such grants include – cash compensatory to control an increase in transport cost, and labour wage and duty drawbacks to increase the flow of export.

What are the benefits of Export Finance?

Export finance offers several benefits that can significantly assist businesses in expanding their operations globally. Here are some of the key advantages:

1. Improved Cash Flow

Export finance provides the working capital needed to fulfill international orders, helping businesses maintain a healthy cash flow.

2. Risk Mitigation

Various export finance instruments like the letters of credit can help mitigate risks such as non-payment or delayed payments from overseas clients.

3. Increase in Sales and Profit

With easier access to funds, businesses can take on more international orders, leading to an increase in sales and, subsequently, profits.

4. Enhanced Competitive Edge

Being able to offer favorable credit terms to international buyers can make a business more competitive in the global marketplace.

5. Currency Fluctuation Protection

Some export finance options offer hedging against currency fluctuations, thereby protecting profit margins.

6. Quicker Turnaround Times

Export finance solutions can often be arranged more quickly than traditional loans, allowing businesses to capitalize on opportunities faster.

7. Flexibility

Export finance solutions are generally more flexible than traditional financing options, allowing for customization according to business needs and market conditions.

8. Geographic Expansion

Export finance can serve as a catalyst for businesses looking to enter new international markets. With the financial backing to take on the added risk and complexity of exporting, businesses can more confidently expand geographically

9. Easier Compliance

Export finance firms are familiar with international trade regulations, helping businesses navigate complex compliance issues.

10. Strengthened Business Relationships

Timely fulfillment of international orders strengthens relationships with overseas clients, which can lead to repeat business.

These benefits collectively make export finance an attractive option for businesses looking to grow and succeed in the international market.

Depending on one’s need and long-term export strategy, businesses involved in international trade should select a suitable export financing option.

You can fulfil your working capital requirements by simply completing an application process online.

KredX GTX stands as an innovative solution in the realm of international trade financing, specifically designed to meet the needs of Indian businesses involved in global trade. As a fully digital platform, it eliminates the bureaucratic hurdles commonly associated with traditional export financing. This ensures not only a quicker but also a more efficient disbursal of funds. Businesses can thereby capitalize on international opportunities without being hampered by liquidity issues, thereby gaining a competitive edge in global markets. Overall, KredX GTX provides a streamlined, digital, and highly effective solution for export financing, making it an invaluable tool for businesses looking to expand their international footprint.