How to Finance your Export Business' Working Capital

Pre export and post export financing has got a confirmed export order and has now started manufacturing her export items .

However , there is considerable working capital cost involved in the process and NIU does not have enough money to cover all the costs .

Not to worry .

We explain here how the government of India and banks can help her cover her costs .

Finance can be extended to exporters at the pre shipment stage in rupees as well as foreign currency .

Here are some of the ways packing credit , working capital finance can be extended in anticipation that the borrower would receive payment on export of the goods .

This loan can be taken not just for packing but also for purchase processing and manufacturing of exports .

NIU needs to provide an export order or a letter of credit as proof .

There is an interest which is charged on the packing credit given further , the firm must pledge its stocks or other advances against the credit given shipment .

Finance , post shipment credit is an advance granted by a bank to an exporter like Nikko .

After export shipment , it is always given against the proof of shipment of exports like the export declaration forms prescribed by the R B I .

The advance is still the date of realization of the export proceeds , advance against duty .

Drawback duty drawback is a refund of duties like GST paid on inputs in the manufacture of export goods to the exporter .

Banks can grant advances to exporters against their entitlements of duty .

Drawback .

The period of such advances is up to 90 days shipping bill copies containing the E G M number needs to be produced to the banks for such advances .

Advance against scripts .

As explained in earlier video exporters are issued benefits by D G F T called A E I S and S C I S scripts under the export from India incentive scheme for their goods or service exports .

These scripts are freely transferable , they can be pledged to other parties in return for cash advances .

Such transactions involving scripts are usually between individual entities and not with banks .

Forfeiting a forfeit is a French term , meaning the right to relinquish here , Nikko can relinquish her right to a future cash receivable to a third party called the for in exchange .

The can provide her an immediate cash payment .

The disadvantage to Nikko here is that the value of this immediate cash payment would be at a discount to the actual receivable value .

The advantage here is that any risks and responsibilities for collecting the debt are passed on to the forfeit before forfeiting NIU should go through the specific R B A circulars on forfeiting and ensure compliance .

Factoring .

Factoring is similar to forfeiting in concept .

It differs from forfeiting in details as follows .

Firstly , factoring is done on trade receivables of short maturities .

Unlike forfeiting in factoring , the buyer has legal recourse in case of non payment and the entire risk and responsibilities are not transferred .

Thirdly in forfeiting , the export bill is purchased by the forfeit .

While in factoring , the invoice is purchased by the buyer at a discounted value .

There are specific R B I circulars on factoring that Nico should read through interest equalization scheme .

Lastly , the Department of Commerce or D G F T offers the interest equalization scheme under the scheme , the interest rate charged by banks on pre and post shipment credit finance is reduced by 3% per annum .

This reduction of 3% is covered by the government of India to support trade entrepreneurs like NIU .

For more details on packing credit , et cetera .

Nikko could approach a private or public sector bank .