Definition of Export Finance:
Export Finance or Export Credit facility is the term where the bank sanctions exporter/sellers required working capital before the importer pay for the delivered goods or services.
Let’s understand this by an example:
The importer introduces a purchase agreement with the exporter/seller across the border. Both the seller and the importer agreed on the payment terms to pay on the specified date. As the export finance payment terms are generally between 60 to 90 days or it can be shorter to 30 days and the exporter has already shipped the goods sold, he will not receive any payment from the importer until the invoice is due. At this point, Export finance helps them to facilitate cash flow for day-to-day business activities.
Objectives of Export Credit:
The main objective of this facility is to enable exporters to:
- Procure raw materials.
- Carry out the 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 costs of the business
- Pre-shipment export credit, or Packing credit
- Post Shipment export credit
Types of Export Credit:
There are two types of export credit the banks provide to its client against the exported goods. These two are :
- Pre-Shipment Export Credit
- Post -Shipment Export Credit
1. Pre-shipment Export Credit
Pre-shipment finance is provided before loading the goods on the Ship. Such kind of credit assures the exporter for procurement and processing of Raw Materials, Manufacturing of finished goods, packing and transporting of exported goods. In other words, it is the facility extended to the exporter by the bank before and till the goods are shipped for export to the foreign buyers. This credit is also called packing credit although its area is not limited to packing. Preshipment finance is provided against Irrevocable Letter Of Credit.
The exporter may seek pre-shipment finance under the following ways:
- Packing Credit
- Advance under “Red Clause Letter of Credit”
- Back-to-Back Letter of Credit
This is normally a short-term advance given with a fixed repayment date to an eligible exporter for the purpose of buying, processing, manufacturing, packing, and shipping the exported goods. Such facility is granted to an exporter who has a foreign buyer’s order by way of a confirmed export letter of credit.
A packing credit advance does not normally extend beyond 180 days and has to be liquidated by negotiation/purchase of the export bills covering the particular shipment for which the packing credit was granted.
The packing credit facility may be extended in the form of –
- Hypothecation of goods
- Pledge, or
- Export Trust Receipt
Advance under “Red Clause Letter” of Credit:
Red Clause Letter of Credit is a letter of credit where a special clause is added and the clause is authorized by the negotiating bank to make pre-shipment advances to the exporter of the credit to enable him to manufacture or buy goods from local suppliers. Advances under such credit are authorized by the buyer when there is a close relationship between the exporter and the importer. The issuing bank takes the responsibility for advances made by the negotiating bank if the exporter fails to repay or deliver the documents for negotiation.
Back-to-Back Letter of Credit:
Back to Back letter of credit is another type of letter of credit which is opened against Export LC to import raw materials for making the ordered product. Bank usually sanctions 75% to 100% facility against export value. Export LC are kept as Lien on this credit.
2. Post-shipment Export Credit
Any loan or advance granted or any other credit provided by a bank to an exporter of goods from the date of extending credit after shipment of goods to the date of realization of export proceeds as per the period of realization of export proceeds. The realization of export proceeds is 12 months from the date of shipment.