Are you thinking about expanding your business to foreign shores? Venturing into new markets opens doors to new opportunities. However, you cannot escape the need for funding.
Export financing is designed to support businesses in overcoming the unique challenges of international trade. It offers a unique set of tools that eliminate financial constraints to make business processes smoother.
This article explores export finances, the available funding options, and why they are essential instruments.
What is export finance?
Export finance is a financial instrument companies use to facilitate international trade and transactions. When you export goods or services to another country, you may face risks such as non-payment or delayed payment by your overseas buyers.
Export finance helps you mitigate these risks and ensures you receive payment. It can include loans, lines of credit, and insurance policies designed specifically for the challenges of international trade.
For example, if you’re a manufacturer in India wanting to sell your products in Europe, you might worry about getting paid once your goods reach European shores. Export finance tools like export credit insurance can protect you against the risk of your European buyer failing to pay.
What are the types of export finance?
Export finance is a broader term that includes various financial products banks, and financial institutions provide to support exporting goods and services. The different types of export credit finance options include:
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1. Pre-shipment finance
Pre-shipment finance is a funding option that helps you procure or produce the goods you will export. It lets you obtain everything you need to fulfil an order, including materials, labour, and packaging. It is an advance you can use to prepare the product for export without disturbing your cash flow.
2. Post-shipment finance
Post-shipment finance is money you get after your goods have been shipped but before the buyer has paid you. This type of finance helps bridge the gap between shipping your products and receiving payment. It enables you to keep your cash flow smooth to keep your business running, and start working on new orders without waiting for payments.
3. Finance against bill collection
When you export goods, you typically send shipping documents through banks or financial institutions, which the buyer uses to claim the goods. Finance against bill collection means getting an advance based on the expected payments from these shipments. This advance helps ensure continuous cash flow, allowing you to manage your business operations effectively while waiting for the buyer to pay against the shipping documents.
4. Discounting letter of credit
A letter of credit is a financial guarantee from the buyer’s bank that ensures payment for your goods. Discounting a letter of credit means you receive most of this payment in advance from your bank rather than waiting for the buyer to pay. This is beneficial for immediate cash flow needs.
5. Finance against allowances and subsidies
If your government offers allowances or subsidies for exporting goods, you can receive finance against these benefits. This means you get an advance based on the subsidies or incentives you’re expected to obtain for your export activities. This type of finance provides additional support by enhancing availability of cash.
Why is export finance required?
Export finance helps you deal with the challenges and risks of selling or buying goods and services to other countries. Here’s why it’s vital for your business:
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Avoid payment risks:
When dealing with customers in other countries, there’s always a worry they might not pay. Export finance gives you tools, like letters of credit, that guarantee you’ll get your money.
Increase your cash flow:
Waiting for payment from international clients can tie up your money for a long time. Export finance offers solutions to get you the cash you need sooner. This keeps your business running smoothly and helps you take on new orders without hitches in your workflow.
Handle big orders easily:
Selling big-ticket items like machinery or tackling large projects often requires a lot of money upfront. Export finance provides the funds and guarantees to confidently take on these big deals. This allows you to grow your exporting business without worrying about down payments.
Expand into new markets:
Export credit finance reduces the financial risks and barriers to entering a new market. This lets you explore and succeed in new geographical locations and opens up exciting business opportunities.
Competitive advantage:
Offering attractive payment terms can set you apart. With export finance, you can give your customers better options that make them more likely to import products from your business.
Protect your investments:
Trading internationally comes with risks, including changes in currency values and political instability. Export finance offers ways to protect your business from these risks so you can trade confidently and securely.
Economic development:
Export finance supports the growth of international trade, which is a critical driver of economic development. By facilitating exports, countries can increase their foreign exchange earnings, improve their trade balance, and create jobs.
Support for Small and Medium-sized Enterprises (SMEs):
SMEs often have more difficulty accessing traditional forms of finance due to their size, lack of collateral, or limited credit history. Export credit programs support SMEs and help them compete in an international market.
Final thoughts
Export finance is a reliable financial tool to secure your exporting business. It reduces the risks of international trading and lets you expand your business in peace. While export credit financing is excellent for exporters, business loans are a more versatile financing option that supports all business types.
Business loans provide the necessary funds for various purposes, such as expanding your business operations, investing in new equipment, hiring staff, or managing day-to-day expenses. They also have flexible repayment schedules, which can be determined using the business loan EMI calculator.
Tata Capital offers specialised business loans to help you grow your business without financial limitations. Tata Capital business loans come with competitive interest rates, a minimal business loan documents required list and custom repayment terms to fit your financial needs.
11 June 2024
6 mins read
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