Like every business organization, the exporters depend primarily on the capital to maintain their everyday operations and productions. Moreover, exporters might find it challenging to sustain the business activities if there is a lack of working capital. In those situations, export finance may be a suitable solution.
What does export financing mean?
From the name, one can quite understand that export financing provides financial support to any business organization that deals with the international market. In the sphere of international trade, one can see a significant gap between exporting goods and receiving the payment. It can often strain the cash flow of the exporter.
Moreover, the export financing service helps the exporter with a reliable source of cash flow to keep up the operations active. The purpose of export financing may arise when the business requires working capital. In every non-banking and banking institution, along with the foreign trade-based lending institutions, it provides export finance to the exporters; this helps them create business funding that helps in the smooth operation of the business.
Why should you choose export financing?
Most business organizations or exporters choose export financing as the financing option during the post-shipment and pre-shipment phases. Also, in some instances, the funding option proves to be useful in case of:
Starting a new business that is based on exports and imports
For expanding the business
To meet the requirement of the working capital in the business organization
To keep the production on without any inconvenience.
Working of export financing
One of the fundamental functions of export financing is similar to that of invoice factoring. Under the funding option of export financing, the exporters can lend capital against their outstanding bill value. Moreover, in every asset-based financing, the invoices of the foreign debtor are treated as the security to lend the cash. Specific pointers highlight how this financing works.
The information of the customer purchasing the goods from the exporter.
The exporter needs to raise an invoice for the purchase from the importer. It allows the customer to make the payment of the required item and ship the goods.
To keep the smooth movement of the cash flow, the exporter can sell this invoice to the financial institution. In exchange, the exporter may pick up a significant share of that invoice value.
The financial institutions take over all the responsibilities to collect the following payment from the customer on the written due date.
Once the payment gets done, the lender transfers the invoice amount to the exporter deducting some nominal fee.
Factors that one should consider before taking up the export finance
Before the exporter takes up export finance, they must consider certain factors. These are:
Purpose of financing
The financing tenor
The cost involved with various methods of funding
The associated risks that one goes through before availing of the funding option
The governmental benefits on export finance
Apart from every other benefit, the government is one source that can provide finance to the exporter. The financial assistance provided by governmental agencies gives the exporter zero-duty export promotion on the importation of the capital goods. Once the exporter figures out the need for export finance, they can apply for funds in these governmental agencies. These agencies include various financial institutions and other non-banking financial institutions.
Where can you get export finance in India?
One can get export finance in different banking or non-banking corporations. Other names include the regional rural, foreign, private sector, nationalized, and certain cooperative banks.
Before getting export finance or business funding in India, read this article to know all the relevant information about it.