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What is export finance and why is it required?

Export finance is a method to ensure that exporters have enough money on hand to meet their working capital. Learn more about its types and working, here.

Finance is an important part of any business, and even more, when it is an international trade transaction. Since the operational cycle of an export agreement is relatively longer than a domestic one, it is important for exporters to plan their finances.

What is export finance?

Export finance is a method to ensure that exporters have enough money on hand to meet their working capital and other international transaction needs. When delivering goods to another country, businesses need export finance to ensure that the products can be manufactured and shipped within a predetermined budget¹.

Types of export finance

· Pre-shipment export finance is given to exporters so they can buy raw materials that are used to manufacture final goods. Usually in the form of packing credit, it is given to exporters in exchange for an importer-placed export order. This credit will be readjusted once payment has been received from the importer.
· Post-shipment financing is available to businesses after their goods have been shipped.
· With bill discounting and invoice factoring, an exporter can offer an invoice to a bank or financial institution in exchange for a discount or a factored payment at a pre-determined discount rate.
· Letter of Credit
· Finance against allowances and subsidies given by the government

What are the sources for export finance?

There are many sources for sellers to raise or obtain export finance in India. Some of the common options are government incentives schemes like Duty Drawback and Advance Authorization. The zero-duty Export Promotion Capital Goods scheme, which is offered on the import of capital goods, allows exporters to claim a payment. Apart from this, financial aid is available from a variety of sources including banks, non-banking financial institutions and institutions focused on financing international commerce².

How does export finance work?

In a regular export procedure, an importer purchases from the exporter, who sends an invoice and dispatches goods based on an agreement. Usually, an exporter receives payment anytime between 30 to 90 days after sale or shipment. This is where export finance helps since it allows the exporter to maintain cash flow.

Why is export finance important?

Some of the reasons for export finance are:
· Beginning an export business from scratch
· Growth stage of a business
· Working capital requirement

How do Export Promotion Councils help in export finance?

Export Promotion Councils hold workshops all year for seasoned and new exporters. Seminars cover documentation, commercial language, business plan creation, and financial literacy. Exporters might seek commercial and financial aid in both circumstances.

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Frequently Asked Questions

How much does export finance cost?

Export finance expenses depend on a variety of factors like invoice total, payment terms and incoterms.

Is it necessary to take export finance?

It is suggested that exporters opt for export finance when setting up a new business or to manage their working capital.

What is an example of export finance?

Invoice factoring is an example of export finance.

What is the difference between trade finance and export finance?

Trade finance refers to financial services to assist in international and domestic trade. Financing that facilitates export of products and services, generally through the provision of advance or guaranteed payment, is export finance.

What are the stages of export finance?

It usually includes pre-shipment and post-shipment.

Published on November 29, 2022.

Sources:
1. https://www.emeriobanque.com/blogs/export-finance-types-and-why-it-is-required
2. https://icc.academy/what-is-export-finance/
3. https://www.dripcapital.com/en-in/resources/finance-guides/export-finance-types
4. https://marketfinance.com/business-finance/what-is-export-finance#:~:text=Export%20finance%20offers%20a%20way,of%20companies%20who%20export%20trades.

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