EXPORT FINANCE by SHIPRA AND ANCHAL
A product is sold and shipped overseas, therefore, it takes longer to get paid. Extra time and energy is required to make sure that buyers are reliable and creditworthy. In addition, foreign buyers - just like domestic buyers - prefer to delay payment until they receive and resell the goods. All sellers want to get paid as quickly as possible, while buyers usually prefer to delay payment, at least until they have received and resold the goods. This is true in domestic as well as international markets.
Increasing globalization has created intense competition for export markets. Importers and exporters are looking for any competitive advantage that would help them to increase their sales. Flexible payment terms has become a fundamental part of any sales package.
Exporting activity often places a strain on exporters’ cash flow reserves, limiting the amount of working capital available to fund new orders and to ultimately grow the business. Export finance overcomes these demands, allowing your business to trade without damaging your cash flow.
So financial assistence is extended by the banks to the exporters at pre-shipment and post-shipment stages.
Export finance provides alternative solutions that balance risk and payment. In this overview, we'll outline the two broad categories of trade finance:
Pre-shipment financing to produce or purchase the material and labor necessary to fulfill the sales order; or
Post-shipment financing in order to generate immediate cash while offering payment terms to buyers.
PRE SHIPMENT FINANCE :
Pre Shipment Finance is issued by a financial institution when the seller want the payment of the goods before shipment. A pre requisite to avail of pre-shipment financing is that the Exporter should have a credit facility in place with a bank. Each bank has a credit process that determines the amount of funding the bank can give the company
The main objectives behind preshipment finance or pre export finance is to enable exporter to:
Procure raw materials.
Carry out manufacturing process.
Provide a secure warehouse for goods and raw materials.
Process and pack the goods.
Ship the goods to the buyers.
Meet other financial cost of the business ack the goods.
Types of Pre Shipment Finance :
Advance against Cheques/Draft etc. representing Advance Payments.
Preshipment finance is extended in the following forms :
Packing Credit in Indian Rupee
Packing Credit in Foreign Currency (PCFC)
Pre shipment credit is only issued to that exporter who has the export order in his own name. However, as an exception, financial institution can also grant credit to a third party manufacturer or supplier of goods who does not have export orders in their own name.In this case some of the responsibilities of meeting the export requirements have been out sourced to them by the main exporter. In other cases where the export order is E divided between two more than two exporters, pre shipment credit can be shared between them.
Quantum of Finance :
The Quantum of Finance is granted to an exporter against the LC or an expected order. The only guideline principle is the concept of NeedBased Finance. Banks determine the percentage of margin, depending on factors such as:
The nature of Order.
The nature of the commodity.
The capability of exporter to bring in the requisite contribution
Tenor of this funding :
The RBI has allowed banks to grant this funding at a concession for a maximum period of 180 days. This period can be extended by the bank without referring to RBI for a further period of 90 days. Banks grant this extension in cases where the exporter faces genuine hardships in completing his order.
If an extension is required beyond 270 days (i.e. 180+90 days), the RBI has the discretion to grant another (maximum) extension of 90 days. However, if the exports do not take place at the end of this period, the bank will charge interest from day one, at a rate left to the bank’s discretion.
Currency's get :
Most often the pre-shipment borrowal is in the domestic currency, in the case of an exporter based in India, the Indian Rupee. However in some cases, the exporter may want to borrow in foreign currency because his product has a large import component or he finds the cost of borrowing in foreign currency lower than borrowing in the local currency .
Pre-shipment credit :
Upto 180 days - 10%
Between 180 –270 days - 13%
Over 270 days - Commercial rates which are likely to be higher than the rate applicable upto 270 days.
USD Lending (PCFC) - Maximum of Libor + 1.5 pct
Post shipment finance:
Post Shipment Finance is a kind of loan provided by a financial institution to an exporter or seller against a shipment that has already been made. This type of export finance is granted from the date of extending the credit after shipment of the goods to the realization date of the exporter proceeds. Exporters don’t wait for the importer to deposit the funds
Purpose of Finance:
Postshipment finance is meant to finance export sales receivable after the date of shipment of goods to the date of realization of exports proceeds. In cases of deemed exports, it is extended to finance receivable against supplies made to designated agencies.
Basis of Finance:
Postshipment finances is provided against evidence of shipment of goods or supplies made to the importer or seller or any other designated agency.
Quantum of Finance:
As a quantum of finance, postshipment finance can be extended up to 100% of the invoice value of goods. In special cases, where the domestic value of the goods increases the value of the exporter order, finance for a price difference can also be extended and the price difference is covered by the government. This type of finance is not extended in case of preshipment stage.Banks can also finance undrawn balance. In such cases banks are free to stipulate margin requirements as per their usual lending norm.
Period of Finance:
Postshipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. Concessive rate of interest is available for a highest period of 180 days, opening from the date of surrender of documents. Usually, the documents need to be submitted within 21days from the date of shipment.
Various Types of Export:
Postshipment finance can be provided for three types of export :
Physical exports: Finance is provided to the actual exporter or to the exporter in whose name the trade documents are transferred.
Deemed export: Finance is provided to the supplier of the goods which are supplied to the designated agencies.
Capital goods and project exports: Finance is sometimes extended in the name of overseas buyer. The disbursal of money is directly made to the domestic exporter.
Types of Post Shipment Finance :
The post shipment finance can be classified as :
Export Bills purchased/discounted.
Export Bills negotiated
Advance against export bills sent on collection basis.
Advance against export on consignment basis
Advance against undrawn balance on exports
Advance against claims of Duty Drawback.
. Export Bills Purchased/ Discounted.(DP & DA Bills):
Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or purchased by the banks. It is used in indisputable international trade transactions and the proper limit has to be sanctioned to the exporter for purchase of export bill facility.
2. Export Bills Negotiated (Bill under L/C):
The risk of payment is less under the LC, as the issuing bank makes sure the payment. The risk is further reduced, if a bank guarantees the payments by confirming the LC. Because of the inborn security available in this method, banks often become ready to extend the finance against bills under Lc.
3. Advance Against Export Bills Sent on Collection Basis:
Bills can only be sent on collection basis, if the bills drawn under LC have some discrepancies. Sometimes exporter requests the bill to be sent on the collection basis, anticipating the strengthening of foreign currency. Banks may allow advance against these collection bills to an exporter with a concessional rates of interest depending upon the transit period in case of DP Bills and transit period plus usance period in case of usance bill.The transit period is from the date of acceptance of the export documents at the banks branch for collection and not from the date of advance.
4. Advance Against Export on Consignments Basis:
Bank may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee.However, in this case bank instructs the overseas bank to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date even if according to the practice in certain trades a bill for part of the estimated value is drawn in advance against the exports.In case of export through approved Indian owned warehouses abroad the times limit for realization is 15 months.
5. Advance against Undrawn Balance:
It is a very common practice in export to leave small part undrawn for payment after adjustment due to difference in rates, weight, quality etc. Banks do finance against the undrawn balance, if undrawn balance is in conformity with the normal level of balance left undrawn in the particular line of export, subject to a maximum of 10 percent of the export value. An undertaking is also obtained from the exporter that he will, within 6 months from due date of payment or the date of shipment of the goods, whichever is earlier surrender balance proceeds of the shipment.
6. Advance Against Claims of Duty Drawback:
Duty Drawback is a type of discount given to the exporter in his own country. This discount is given only, if the inhouse cost of production is higher in relation to international price. This type of financial support helps the exporter to fight successfully in the international markets.In such a situation, banks grants advances to exporters at lower rate of interest for a maximum period of 90 days. These are granted only if other types of export finance are also extended to the exporter by the same bank.After the shipment, the exporters lodge their claims, supported by the relevant documents to the relevant government authorities. These claims are processed and eligible amount is disbursed after making sure that the bank is authorized to receive the claim amount directly from the concerned government authorities.
Post-shipment credit :
Sight Bills - Not more than 10%
Upto 90 days - Not more than 10%
91 days upto 6 months - 12%
Types of EXPORT FINANCE:
Working Capital Loans :
For exporters, working capital loan programs are normally associated with pre-shipment financing. Many small businesses need pre-export financing to cover the operating costs related to a sales order or contract. Loan proceeds are commonly used to finance three different areas:
Labor: The people needed to build or buy the export product.
Materials: The raw materials needed to produce the export product.
Inventory: The costs associated with buying the export product.
Eg: TradePort Export Finance Online (TEFO) offers a Working Capital Loan Program
Term Financing for Foreign Buyers:
Frequently, foreign buyers don't have the cash on hand to pay for major purchases. So the buyers ask for extended credit terms and/or financing. Few exporters can manage the cash flow dilemma or commercial and political risks caused by these long-term contracts.
Buyer Credit Programs are often an effective solution that benefits the exporter, their buyer and commercial lenders providing the loans. Programs typically provide loan guarantees to commercial lenders. These kind of programs benefit all the parties involved. The exporter benefits because they’re paid cash on delivery and acceptance of the product or service. The foreign buyer benefits because they get extended credit terms at markets rates or better. And the lender benefits because guarantees, many backed by the U.S. Government, mean full repayment of the loan and a reasonable return on funds loaned.
Eg: TradePort Export Finance Online (TEFO) provides Term Financing for foreign buyers.
The TradePort Export Finance Online (TEFO) Program is a managed financial network of banks, lenders and brokers focused on the small business market. The TEFO/TradePort partnership brings together the international trade strengths of TradePort, the CalTrade Coalition, California’s trade promotion community, private sector banks and lenders, the U.S. Commercial Service, the U.S. Export-Import (EXIM) Bank and the Small Business Administration (SBA) for the benefit of small business trade development.
Sources of Export Financing:
Large multinational banks are generally thought to be the most experienced in trade finance. Frequently these services are reserved for their major clients and maintain transaction minimums of $1M or more. These banks are less interested in working with small businesses because of smaller deal size and volumes accompanied by greater risk. In fact, small importers and exporters often present a business profile that creates obstacles to financing. Even SMEs with large trade deals are not attractive to larger banks due to risk and credit issues such as loan concentration, debt-earnings ratio restrictions or insufficient collateral.
As part of your due diligence when selecting a bank and a financial solution, ask the following questions:
What are the charges for confirming a letter of credit, processing drafts, and collecting payments?
Does the bank have foreign branches or correspondent banks? Where are they located?
Can the bank provide buyer credit reports? At what cost?
Does the bank have experience with U.S. and state government financing programs that support small business export transactions? If not, is it willing to consider participating in these programs?
What other services, such as trade leads, can the bank provide?
Assistance from the Federal Government :
Several federal and local government agencies offer programs to assist exporters with their financing needs. Some are guarantee programs that require the participation of an approved lender, while others provide loans or grants to the exporter or a foreign government. Government programs generally are aimed at improving an exporter's access to credit. They are not intended to subsidize the cost of credit at below-market levels. With few exceptions, banks are allowed to charge market interest rates and fees; a portion of those fees are paid to the government agency to cover the agencies' administrative costs and default risks
Government guarantee and insurance programs are used by commercial banks to reduce the risk associated with loans to exporters. Lenders who are concerned with an exporter's ability to perform under the terms of sale, and with an exporter's ability to be paid, often use government programs to reduce the risks that would otherwise prevent them from providing financing.
Export Import Bank of the United States (EXIM Bank):
EXIM Bank is an independent federal government agency responsible for assisting export financing of U.S. goods and services. It offers a variety of information services, insurance, loan, and guarantee programs.
Ex-Im Bank operates an export financing hotline that provides information on the availability and use of export credit insurance, guarantees, direct and intermediary loans extended to finance the sale of U.S. goods and service abroad. Briefing programs are offered by Ex-Im Bank to the small business community. These programs includes regular seminars, group briefings, and individual discussions held both within the Bank and around the country
U.S. Department of Agriculture (USDA):
The Foreign Agricultural Service (FAS) of USDA administers several programs to help make U.S. agricultural exporters competitive in international markets and make U.S. products affordable to countries that have greater need than they have ability to pay.
These programs are designed to make it easier for commodity exporters to obtain bank financing by providing repayment guarantees to the lenders.
The USDA's Commodity Credit Corporation (CCC) operates Export Credit Guarantee Programs to provide United States agricultural exporters or financial institutions a guarantee that they will be repaid for short- and intermediate-term commercial export financing to foreign buyers. These programs protect against commercial or noncommercial risk if the importer's bank fails to make payment. Under one program, the CCC will guarantee credit terms of up to 3 years and under another, credit terms from 3 to 10 years are guarantee
Small Business Administration (SBA):
The SBA has some services specifically designed to help the small business get started in exporting. The SBA provides financial assistance programs for U.S. exporters. Applicants must qualify as small businesses under the SBA's size standards and meet other eligibility criteria. The SBA has two main programs to assist U.S. exporters—the Export Working Capital Program and the International Trade Loan (ITL) program.
The SBA programs provide the small business owner with financing aids that will enable the business to obtain the capital needed to get into exporting.
This program is designed to help small business exporters obtain financing by reducing risks to lenders. The SBA will guarantee up to 90% of a loan from a private bank. The proceeds from the loan can be used for pre-shipment working capital, post-shipment exposure coverage, or a combination of both.
BENEFITS OF EXPORT FINANCE:
Each export finance solution can be tailored to meet a business’ individual funding needs.
While export factoring advances funding against your invoices within 24 hours of their issue, pre-shipment and post-shipment finance will help to fund exporting activity before you receive payment.
Funding can be advanced in the favoured currency to mitigate any fluctuations in exchange rates.
Funders will have a strong knowledge of the overseas countries in which you operate.