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Export Financing, As the name suggests, this particular type of, financing pertains to export., The primary aim of export financing is to, provide financial support to businesses that, dealing in the international market. In, international trade, a significant gap exists, between exporting goods and receiving payment, from buyers that often strains the exporter’s, cash flow.
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Why Should One Choose Export, Financing?, • 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 postshipment 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 –
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Why Should One Choose Export, Financing?, •, •, •, •, , To start a new export-based business, For business expansion, To meet the working capital requirement, To keep production undisturbed
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Source of export financing, ●, ●, ●, ●, , Commercial banks, Export import Bank of India, Reserve Bank of India, Export credit and guarantee corporation
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Forms of Export Finance, 1.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
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Export Financing, 2.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 –, – Forfeiting, – Factoring
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Export Financing, • Introduction, • Forfeiting and factoring are services in, international market given to an exporter or, seller. Its main objective is to provide smooth, cash flow to the sellers., • The basic difference between the forfeiting, and factoring is that forfeiting is a long term, receivables (over 90 days up to 5 years) while, factoring is a shorttermed receivables (within, 90 days) and is more related to receivables, against commodity sales.
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Forfeiting, • In international trade, forfeiting may be, defined as the purchasing of an exporter’s, receivables at a discount price by paying, cash. By buying these receivables, the, forfeiter frees the exporter from credit and, the risk of not receiving the payment from, the importer.
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What Information Does a Forfeiter Need?, • The forfeiter requires the following information to participate in the, transaction:, • The identity of the buyer, • Buyer’s nationality, • Nature of goods sold, • Detail of the value, • Currency of contract, • Date and duration of the contract, • Credit terms, • Payment schedule, • Interest rate, • Know what evidence of debt will be used, e.g., promissory notes, bills of, exchange, letter of credit, etc., • The identity of the guarantor of payment, •
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Documents Required by the Forfaiter, from the Exporter, • Copy of supply contract, or its payment’s terms, • Copy of shipping documents, including airway bill,, bill of lading, certificates of receipt, railway bill,, or equivalent documents, • Copy of signed commercial invoice, • Letter of assignment and notification to the, guarantor, • Letter of guarantee
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Forfeiting, • The forfeiting typically involves the following cost, elements:, • 1. Commitment fee, payable by the exporter to, the forfeiter ‘for latter’s’ commitment to execute, a specific forfeiting transaction at a firm discount, rate with in a specified time., • 2. Discount fee, interest payable by the exporter, for the entire period of credit involved and, deducted by the forfaiter from the amount paid, to the exporter against the availised promissory, notes or bills of exchange.
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Benefits Forfeiting to Exporter, • 100 per cent financing : Without recourse, and not occupying exporter's credit line That, is to say once the exporter obtains the, financed fund, he will be exempted from the, responsibility to repay the debt., • Improved cash flow : Receivables become, current cash in flow and its is beneficial to the, exporters to improve financial status and, liquidation ability so as to heighten further, the funds raising capability.
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Export Financing, • Reduced administration cost : By using, forfeiting , the exporter will spare from the, management of the receivables. The relative, costs, as a result, are reduced greatly., • Advance tax refund: Through forfeiting the, exporter can make the verification of export, and get tax refund in advance just after, financing., • Increased trade opportunity : With forfeiting,, the export is able to grant credit to his buyers, freely, and thus, be more competitive in the, market.
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FACTORING, • Definition of Factoring, • Definition of factoring is very simple and can be, defined as the conversion of credit sales into cash., • Here, a financial institution which is usually a, bank buys the accounts receivable of a company, usually a client and then pays up to 80% of the, amount immediately on agreement., • The remaining amount is paid to the client when, the customer pays the debt. Examples includes, factoring against goods purchased, factoring, against medical insurance, factoring for, construction services etc.
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Characteristics of Factoring, • 1. The normal period of factoring is 90,150, days and rarely exceeds more than 150 days., • 2. It is costly., • 3. Factoring is not possible in case of bad, debts., • 4. Credit rating is not mandatory., • 5. It is a method of offbalance sheet financing., • 6. Cost of factoring is always equal to finance, cost plus operating cost.
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Export Credit Guarantee Corporation, of India(ECGC), • The ECGC Limited (Formerly Export Credit, Guarantee Corporation of India Ltd) is a, government owned export credit provider. It is, under the ownership of Ministry of Commerce, and Industry, Government of India based in, Mumbai, Maharashtra. It provides export credit, insurance support to Indian exporters. Its, topmost official is designated as Chairman and, Managing Director who is a central government, civil servant under ITS cadre.
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Export Credit Guarantee Corporation, of India(ECGC), • Government of India had initially set up, Export Risks Insurance Corporation (ERIC) in, July 1957. It was transformed into Export, Credit and Guarantee Corporation Limited, (ECGC) in 1964 and to Export Credit, Guarantee Corporation of India in 1983.
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Objectives of ECGC, • 1. To encourage and facilitate globalization of, India's trade., • 2. To assist Indian exporters in managing their, credit risks by providing timely information on, worthiness of the buyers, bankers and the, countries.
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• 3. To protect the Indian exporters against, unforeseen losses, which may arise due to, failure of the buyer, bank of problems faced, by the country of the buyer by providing cost, effective credit insurance covers in the form, of Policy, Factoring and Investment Insurance, Services comparable to similar covers, available to exporters in other countries.
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• 4. To facilitate availability of adequate bank, finance to the Indian exporters by providing, surety insurance covers for bankers at, competitive rates., • 5. To achieve improved performance in terms, of profitability, financial and operational, efficiency indicators and achieve optimum, return on investment.
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• 6. To develop world class expertise in credit, insurance among employees and ensure, continuous innovation and achieve the, highest customer satisfaction by delivering, top quality service., • 7. To educate the customers by continuous, publicity and effective marketing Functions.
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Functions of ECGC, • 1. Provides a range of credit risk insurance, covers to exporters against loss in export of, goods and services., • 2. Offers Export Credit Insurance covers to, banks and financial institutions to enable, exporters to obtain better facilities from them.
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• 3. Provides Overseas Investment Insurance to, Indian companies investing in joint ventures, abroad in the form of equity or loan, • 4. Provides guidance in export related, activities, • 5. Provides information in different countries, with its own credit ratings, • 6. Allocates the export finance from banks/, financial institutions
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• 7. Helps exporters to come out of their bad, debts, • 8. Provides information on credit worthiness, of overseas buyers, • 9. Provides overseas investment insurance
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4. Forfeiting, • Forfeiting is a mechanism where the exporter, surrenders his rights to receive payment against the, goods and services rendered to the importer in, exchange for a cash payment from the forfeiter., Through forfaiting, the exporter can easily convert a, credit sale into a cash sale, without recourse to him or, his forfeiter., • In forfaiting arrangements, the trade receivables must, involve capital goods and are financed up to 100%, without recourse. The arrangements can involve, dealing with negotiable instruments., •
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What Information Does a Forfeiter Need?, • The forfeiter requires the following information to participate in the, transaction:, • The identity of the buyer, • Buyer’s nationality, • Nature of goods sold, • Detail of the value, • Currency of contract, • Date and duration of the contract, • Credit terms, • Payment schedule, • Interest rate, • Know what evidence of debt will be used, e.g., promissory notes, bills of, exchange, letter of credit, etc., • The identity of the guarantor of payment, •
