Being a trader or exporter, you may understand the need for export finance. Though banks are offering different types of loans and facilities to the exporters, export finance not only helps traders continue their production but also promotes the country's foreign exchange earnings. But how and what is export finance? Let us explain!! What Is Export Finance?There is no denying that finance plays an important role in the successful operation of a business. Export Trade finance service helps exporters fund their production process and other global trade transactions to assure that the exporter has enough production of their goods & services to send to the concerned importers. It lessens their financial discrepancies and manages their cash flow to handle their day-to-day working capital requirements. Export finance ensures the affordability of the production of goods for the exporter along with an assurance of getting paid on time. But the question is which type of export finance should an exporter choose. There are many types of export finance available in the market. Here they are as follows: Types of Export Finance1. Pre Shipment Finance - Also known as packing credit, exporters apply for pre-shipment finance when they require funds to purchase raw material/goods, to continue the production process, or for storage cost, packing, marking of goods after a purchase order is placed by the importer. To put it simply, pre-shipment finance is provided to an exporter before the shipment of goods to continue the production process. It is generally granted for a period of 180 days and in case of opposite circumstances, it can be extended to 90 days.
2. Post Shipment Finance - After dispatching the goods to the importer, a bill is drawn by the exporters that need to be paid by the importers. It generally takes a minimum period of 3 to 6 months and this time gap affects the production process for the exporter. To overcome this working capital inefficiency, the bill gets presented to the financial institution that provides funds to the exporter. The bill can be purchased, collected, or discounted by the bank. This type of export Trade finance is used by the exporter to pay wages or other services. 3. Finance Against Collection Of Bills - Another way through which an exporter can raise funds is by applying for a loan against the bills of purchases made by the importers or foreign companies. Various banks and FIs are ready to finance these export bills. If there is any default made by the importer, the finance company is entitled to compensate about 80% of the default amount. 4. Deferred Export Finance -Here, finance is provided to the importers/overseas buyers to ease the import of goods. It has two types:
5. Finance Against Allowances And Subsidies - Here, exporters get various subsidies and allowances from the government to sell the goods at a discounted price to the importer. Now you know what export finance is and how it helps exporters in continuing their production and shipment process. Additionally, it mitigates the risk of default of payment from the importer.
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