Meaning and importance of export finance in English

What do you understand by export finance ? Throw light on the importance of export finance.

Contents

Meaning and importance of export finance

Meaning of Export Finance

In the export business credit facilities are provided to the buyers. It is significant for the determinants of export business.

The extent to which credit must be provided depends on the sale terms and conditions. If exporter does not get cash in advance there shall be problem regarding the finance. When exporter receives payment at the time of the shipment, he has to make own arrangement to meet financial requirements at the pre-shipment stage when export is made on credit, the exporter will suffer more financially. In these cases he requires export finance or export credit. Export finance facilities enables him not only to meet their financial needs at the pre-shipment stage but also to extend credit facilities to importers.

Importance of Export Finance / Export Credit

Export finance plays a significant role in the export promotion. An exporter may use financial assistance for export of his goods and services to foreign importer which is available from the bankers in two stages viz. pre-shipment stage and post-shipment stage.

Pre-shipment Stage Finance : Pre-shipment finance covers the credits extended by banks to exporters prior to the goods such credits are meant to the purchase of raw materials processing of the raw materials, packing, transporting the goods meant for export, warehousing etc. Generally, this form of credit is in the form of working capital advances, loans cash credit and overdraft.

Post-shipment Stage Finance: Any loan or advance granted or any other credit provided by an institution to an exporter of the goods from India from the date of extending the credit after the shipment of goods to the date of realization of the export proceeds and includes any loan or advance granted to an exporter in consideration of or on the security of any duty drawback or any cash payment by way of incentive from, the marketing development fund or any other relevant source.

The need for post shipment finance arises because exporters who sells goods abroad have to wait for a long time before payment is received from overseas buyers. The actual period of waiting depends on the payment terms. In the mean time, the exporter has to make payment to the loan manufacturer of goods or if he is a manufacturer exporter, he has to pay the suppliers. Under such circumstances very few manufacturer exporters and merchant exporters have the means to finance the credit terms they extend to overseas buyer.

There are number of agencies engaged in providing expert finance. Among the various institutions which promote foreign trade, commercial banks used to provide export finance in the country. Commercial banks provide both pre-shipment and post-shipment credit for the exporters.

Generally bank provide export credit against the security of irrevocable Letter of Credit (LCs) confirmed order or the contract placed by the overseas buyers, barring a few exceptions, the quantum of credit does not exceed free on board value of the good domestic value of goods, whichever is less. The post-shipment credit or the provided by the banks mainly helps the exporters to face delay in receiving payments from overseas buyers.

While extending financial assistance to the exporters, banks are governed by the RBI guidelines issued from time to time, the Trade and Exchange Control Regulations and the International Conventions and codes of the International Chamber of Commerce.

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