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Export Finance

Export finance

Export finance refers to financial help required by export business for exporting their products to overseas countries. It assists small and medium-sized businesses grow globally by managing hard payment terms. It also helps businesses release working capital from cross-border or domestic trade transactions that would otherwise be tied-up in invoices or purchase orders (for up to 180 days).

Export trade finance helps exporters financially who are willing to sell goods to international buyers. It results in fascinating more customers for the product followed by increased sales of the customers, and more profit from those sales.

The exporter may require short term, medium term or long term finance depending upon the type of commodities being exported. There exist different types of trade finance companies and trade finance institutions depending on the business needs and the nature of the export transaction. Export finance basically provides exporter financial support from manufacturing, production of goods to delivery of goods to the buyer. These facilities are provided using factoring and export factoring to import export business by trade finance providers.

However, if the buyer is offering conventional repayment terms (usually, within a time period after the goods are received by the buyer), exporters can face lengthy trade cycles and financial uncertainty. So here export invoice finance can be used to advance payment to exporters by a trade financier to ease cash flow pressures. It can be considered as a loan for exporter for accomplishing various tasks involved in the export of goods. Apart from this, there exist various methods of payment in international trade such as letter of credit, cash in advance, documentary collections and open account.

There exist various finance companies which offer financial guarantees and bridge the finance gap from seller to buyer as well as establish trust amongst them. Export finance helps to reduce cash flow problems with payment guarantees from a customer when goods are being exported, advance payments for access to additional working capital and the discounting of customer invoices to avoid payment delays.

Types of export finance

  • Pre- shipment export finance (180-270 days)
  • Post shipment export finance (180 days)
  • Export finance against the collection of bills
  • Export finance against allowances and subsidies

Above mentioned are the types of export finance available within the international trade finance. All these together make it possible for the exporter to get finance at each and every level whenever needed by them. This finance ensures that exporters don't have to go through financial crises. Various risks within exports are covered by trade finance which results in betterment of both supplier and buyer.

See How Export Finance works.

Pre Shipment Export Finance

It is provided to the exporter when they ask for a certain amount of payment for arranging various necessary things such as raw materials. This finance is needed for processing raw material into finished goods. Once the processing is done they have to be stored at relevant places and for that some cost has to be paid. Also for packing and shipment of goods to the port finance is needed. Exporter can apply for this finance once order is confirmed by the buyer and its proof have to be shown in the finance institution for further processing. It is granted for 180 days. If some kind of uncertainty occurs then this can be extended to 90 days. Maximum allowable period is 270 days.

Post Shipment Export Finance

Once the shipment of goods towards importer is done the exporter is supposed to make bill that has to be paid by the importer. It’s a lengthy process and takes almost 3 to 6 months to receive the payment from the importer and meanwhile production of exporter can get affected. So to avoid this exporter presents this bill in the finance institution which will pay for the wages and other services such as shipping charges. Post shipment credit is basically to help the exporter financially till payment from importer is received. So the production and others work keeps on going.

Export finance against the collection of bills

The finance can be obtained by the supplier/exporter on the basis of bills of purchase made by the importer. If in case any default occurs, the finance institution has to compensate almost 80% of the default amount. It can be considered as post shipment finance.

Export finance against allowances and subsidies

If uncertain circumstances occur then there is an unexpected rise in expenditure that might be due to national and international changes, the government has to provide allowances or subsidies for export of commodities that too at reduced price to the importer.

Importance of export finance

  • Export Finance allows you to handle your business transactions quickly and efficiently.
  • It is flexible and simple to use - monitoring of each individual transaction from start to finish is possible and you can always enquire about previous transactions
  • It covers and helps you to deal with the risks present within the international trade which includes legal risks, political risks, marketing and financial risks. Learn about risk mitigation in international trade
  • Easy cash flow management
  • It leads to more efficient allocation of resources and lower cost per unit
  • Helps to widen the range of choice of commodities
  • Helps the company to grow and increase trade

Sources of export finance

Number of institutions has emerged in providing export finance and adding on existing institutions has opened up various avenues for granting export finance. Following are the major sources for providing export finance to the exporter:

  • Export Import bank
  • Commercial banks, both nationalized and non-nationalized
  • Development banks such as IDBI, ICICI, etc.
  • Small Industries Development Bank of India
  • State Finance Corporations
  • National Small Industries Corporation
  • Export Credit Guarantee Corporation.

Various Documents required for Export Finance are Bill of Exchange, Bill of lading, Certificate of Origin, Letter of Credit and much more.

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FREQUENTLY ASKED QUESTIONS

1. what is meant by pre-shipment finance?

Pre-shipment finance is the finance required by an exporter before the shipment of goods. Pre-shipment finance provides the exporter with working capital required for funding of wages, production cost, buying raw materials, processing and converting into finished goods and packaging. Pre- shipment finance is extended under the concessional rates of interest at 7.5 per cent, to a maximum period of six months.


2. What does post shipment finance mean?

Post-shipment finance refers to the finance extended after the shipment of goods. In this type of export finance, the financer advances the payment, post shipment, to gain liquidity between shipping the goods and receiving payment. It mostly bridges the gap between the date of extending the credits after the shipment of goods to the date of realization of the export proceeds. Post-shipment finance is extended under the concessional rates of interest at 8.65 per cent, to a maximum period of six months.


3. Why post shipment credit is required?

In order to accomplish a number of tasks and other orders an export requires certain amount of money which gets fulfilled by post shipment credit. It is important to maintain the workflow within the organization.


4. How does export finance work?

Export finance provides a way for businesses in order to release working capital, specially from overseas transactions which may remain tied up within the invoices for a much longer period of time. Export finance is very specifically tailored to cope up with the overall financial demands of business companies who are involved in International trade. Know More.

Difference between invoice factoring and discounting


5. What are the sources of export finance?

Commercial Banks Export Intermediaries Multilateral Development Banks(MDBs) State and Local Export Finance Programs Government Assistance Programs


6. What are the four different methods of export financing?

Export Development and Working Capital Financing Facilities Development Financing Financing for your International Buyers Investment Project Financing


7. What are the export payment terms?

  1. Open account
  2. Documentary collections
  3. Letter of credit
  4. Cash in advance
  5. Bank drafts
  6. EXIM bank