The Small and Medium Enterprises (SME) sector is considered the backbone of the Indian economy, and rightly so. It accounts for around 37.54% of the country’s total GDP and also contributes a share of 40% in the national exports.
The export potential of SMEs can rise further if they have easy and affordable access to export finance. If you are an SME entrepreneur who has overseas customers or is willing to explore foreign markets, here is your useful guide about raising capital for exports.
What is Export Finance?
This term pertains to various loans that you can apply for exporting your products and services. You can get these loans from the Export-Import (EXIM) Bank of India, State Finance Corporations, nationalized banks, private banks, and even Non-Banking Financial Companies (NBFCs).
Business loans for exports provide the following benefits:
· Expand your business outside of India
· Start a new export business
· Maintain operational liquidity (working capital)
· Get cash flow for other business expenses
· Release tied-up capital in invoices or purchase orders
· Speed up the export process and transactions
· Reduce business risks
· Enhance your brand visibility and reputation among international customers ·
· Compete with global brands confidently
· Boost your sales and profits
You can get export finance at both the pre-shipment and post-shipment stages. You can utilize the money for procuring the raw materials, manufacturing the goods, and packaging them. The capital can also help you in the distribution and delivery of the products to fulfill the orders.
Types of Export Finance
There are various types of export loans available for SMEs, depending on the business purpose.
This loan is available to meet day-to-day business expenses and working capital requirements. Usually, you have the flexibility to utilize this loan for any business purpose to simplify your export process.
If you have received an export order, you can apply for packing credit. This finance can help you to meet manufacturing and processing costs before the shipment of the order. Once the importer pays you against the order, you can repay the loan.
Invoice discounting is also known as bill discounting. You can present your outstanding invoices to the lending institution. You can receive a loan of up to 75-90% of the outstanding bill value. This loan allows you to fulfill the immediate credit gap of 3-6 months between order request and order fulfillment.
This type of export finance option enables you to sell the outstanding invoices to the financer. The financer becomes responsible for collecting the payment from your overseas customer. The customer is also aware of this type of arrangement.
Finance Against Collection of Bills
The financial institution can give you credit against the bills you need to collect from the importer. You can submit the export bills to your bank. The bank will agree to finance these bills only if there is a repayment guarantee from guaranteeing companies in the event of a default. The guaranteeing company agrees to compensate at least 80% of the export bill amount.
Line of Credit (LOC) LOC is an extension of an overdraft facility. The financial institution gives you a pre-sanctioned limit within which you can borrow money. You can utilize the money for any immediate business requirement.
Letter of Credit Discounting (LC)
LC is a type of finance option where the issuing bank gives a guarantee to make the payment to the seller in case the buyer defaults. Financial institutions give you export capital against LC due to the security of the guarantee.
Finance in the Form of Allowances and Subsidies
Certain events, such as the rise in labor costs or fuel prices and change of shipping route due to a war or a terrorist attack, are beyond your control. The cost of your export may go high, and it can affect your profits. In such scenarios, the government provides allowances and subsidies to help you export the products at lower prices.
A few examples of such finance are the waiver of import duty, duty drawback, and advance authorization scheme.
Banks vs NBFCs – Which is Better for Export Financing?
This comparison chart will help you make an informed decision.
|Paperwork & Documentation||Time-consuming||Hassle-free|
|Loan Sanction Process||Stringent||Quick and convenient|
|Online Application & Disbursal||Not available or complex||Easy, smooth, and transparent|
|Collateral||Mostly required||Unsecured finance available|
Indifi understands that SMEs face a fair share of challenges in export financing. Hence, it offers a suite of customized and affordable business loans without collateral at easy repayment terms. You can apply online, reducing paperwork and associated costs.
Export finance in India is available for SMEs in all states. It is advisable to compare various options against each other and across different lending institutions. You should choose a financial institution that offers you competitive interest rates with flexible terms and conditions.
1. What is the meaning of export finance?
It refers to a type of funding to improve cash flow for exporting your products. You can invest these funds to establish, grow, and expand your SME export business.
2. What are the different types of finance options for an export business?
You can apply for both pre-shipment and post-shipment finance. A few options are a term loan, line of credit, letter of credit, packing credit, invoice discounting, bill factoring, and finance against the collection of bills.
3. What are the sources of trade finance for exports?
The EXIM Bank, nationalized banks, private banks, and NBFCs offer financing options to SMEs running export businesses.
4. Which is the best financing option for SMEs exporting their products?
The export financing option depends on the nature of your business and the purpose for which you need the capital. The type of products you sell and the countries where you export are also important factors.