Credit is an essential requirement for any kind of business. So is the case with exporting also. The various sources available have to be explored by the exporter in order to fulfill the financial requirements of export business.
We can define export credit as “the credits required by the exporters for financing their export transactions from the time of getting an export order to the time of the full realization of the payment from the importers.”
From the time of an export order is received and confirmed, the exporter needs finance (export credit) at pre-shipment stage and also at post-shipment stage.
Finance is required at pre-shipment stage for the following purposes:
- To purchase raw materials and other inputs to manufacture goods.
- To assemble the goods in the case of merchant exporters.
- To store the goods in suitable warehouses till the goods are shipped.
- To pay for packing, marking and labeling of goods.
- To pay for pre-shipment inspection charges.
- To pay for consultancy services.
- To import or purchase from the domestic market heavy machinery and other capital goods to produce export goods.
- To pay for export documentation expenses.
Finance is needed at the post-shipment stage for the following purposes:
- To pay to agents / distributors and others for their services.
- To pay for publicity and advertising in the overseas markets.
- To pay for port authorities, customs, and shipping agent‘s charges.
- To pay towards export duty or tax, if any.
- To pay for freight and other shipping expenses.
- To pay towards marine insurance premium, especially when it is a CIF contract.
- To pay towards various expenses in connection with visits abroad for market surveys, or for some other purpose.
- To pay for collecting information on overseas markets either before or after shipment of goods.
- To pay towards such expenses regarding participation in Exhibitions and Trade Fairs.
- To pay for representatives abroad in connection with their stay abroad.
- To pay for any other activity in connection with export of goods.
Pre-Shipment credit or “Packing Credit”
This is an advance granted to the exporters by the banks for meeting their such financial requirements as purchase of raw materials and its processing, packing, storing and shipping of goods. It is a short term credit which is available to all exporters. Pre-shipment finance is essentially working capital finance made available to the exporters to arrange for goods as per the export order. It is generally granted in the form of overdraft facilities. The exporter interested in availing the pre-shipment credit facility will have to make a formal application to his bank along with a firm contract with the buyer or a copy of the export order or a copy of the letter of credit.
Read: Pre-shipment Finance
Post-Shipment Credit
This is provided to meet working capital requirements after the actual shipment of goods. It bridges the financial gap between the date of shipment and actual receipt of payment from overseas buyer thereof. This finance is extended to the actual exporter who has shipped the goods or to an exporter in whose name the export documents are transferred. It can also be allotted to overseas buyer/institutions under the scheme for Buyer’s Credit and Lines of Credit operated by EXIM Bank. It is extended against the evidence of shipping documents indicating the actual shipment of goods or necessary evidence in case of deemed exports.
Forms of post-shipment finance may be provided in one of the following forms : (a) Export bills negotiated under LC. (b) Purchase of export bills drawn under confirmed contracts. (c) Advance against bills under collection (d) Advance against export incentives receivables. (e) Advance against undrawn balance of bills (f) Advance against deemed exports.
Read: Post-Shipment Finance
Credit: International Finance-MGU