Along with the Reserve Bank of India, the Government of India took several initiatives to contribute to an impressive increase in our country’s exports. Out of all the factors that influence the growth of exports in India, credit plays the most important role. Commercial banks offer short-term export finance with the help of pre-shipment and post-shipment credits. It is also granted in the form of rupees and also in foreign currencies.
Moreover, the export financing gets denominated, and the Reserve Bank of India sets up a particular ceiling on the rate of interest that any financial institution would charge from its borrowers under any schemes. But before we go onto the features, we must understand the concept of export finance in India.
The concept of export finance
Export financing can be defined as a cash flow situation for any exporter. It facilitates the International commerce of goods. Export finance also allows every business to sell their products to another country only to receive the working capital before the clients pay for the purchased product. When the seller agrees to the payment terms of the cross-border buyer, a certain issue of cash flow arises in this situation. Hence, the concept of dealer finance arises in this scenario. But let’s see how it works and helps the business to maintain its cash flow decorum.
How it works
Any exporter would apply for export financing to overcome the cash flow problem. Here are the steps that can help you understand export finance’s working.
- The buyer would send a purchase order to the exporter
- The payment term gets agreed upon between the exporter and the buyer
- The exporter sends an invoice to the buyer
- The exporter ships the goods but waits for the payment
- Exporter transfer invoice to the financing companies
- Financer provides amount as an advance to the exporter
- The buyer transfers the amount to the lender
- The lender transfers the balance without the fees
Cost related to export finance
Export finance comes with various variables. Hence, when you are calculating the export finance cost, it is a tedious and complicated process. But some of the aspects of finance are easier to contrast and compare. The variables examined under export finance are mostly qualitative. It means that you can use it to assess the business relationship between the buyer and the exporter in terms of growth and volume. The export credit agencies can come in handy during the due diligence and risk assessment or while doing the credit checks. The service of these agencies allows the financing providers to look at the creditworthiness of the various parties involved in this process.
Moreover, the traditional lenders can not finance the capital to keep on the export activities. Some of the companies do not have any access to the products related to trade finance. For instance, small companies are less likely to move forward with financing than large corporations.
Once you choose export finance from any financial institution, you can indulge in a wider scope of dealer finance. Specifically, various fintech companies are now looking forward to a trade finance ecosystem. For this reason, they are teaming up with traditional lenders and big financial institutions to bring up the competition.
The funding companies, alternative to this situation, demand lower stringent requirements than any traditional lenders. Hence, broadening the taxable credit accessibility, radius medium and small size corporations are gaining the advantages of dealer finance. Moreover, if you can choose a good financial institution to receive the export finance, you can get the advantage of exchanging documents electronically. Hence, communication with the party becomes less invasive and more efficient.