Export Finance NeedsExport Finance Needs

After obtaining an export order, finance would be needed for:After obtaining an export order, finance would be needed for: Procurement of raw materials and components and manufacture of Procurement of raw materials and components and manufacture of

the product.the product. Refinance facilities so as to get the proceeds of export bills at the Refinance facilities so as to get the proceeds of export bills at the

time of negotiation of export documents, soon after shipping the time of negotiation of export documents, soon after shipping the goods.goods.

Availability of funds until export benefits are realized.Availability of funds until export benefits are realized. Refinance facilities for long-term credits offered for the export of Refinance facilities for long-term credits offered for the export of

products.products.

Export Finance Needs Export Finance Needs Terms of PaymentTerms of Payment Payment by documentary creditPayment by documentary credit: Export orders normally stipulate that importer should : Export orders normally stipulate that importer should

open a letter of credit in favour of the exporter.open a letter of credit in favour of the exporter.Payment by LC is one of the most secure and widely used modes of payment.Payment by LC is one of the most secure and widely used modes of payment.

Advance PaymentAdvance Payment: When the buyer pays the export order/contract value to the : When the buyer pays the export order/contract value to the exporter along with the confirmation of the order, he is stated to have made advance exporter along with the confirmation of the order, he is stated to have made advance payment.payment.This method of payment is rarely adopted and is essential only when the credit-This method of payment is rarely adopted and is essential only when the credit-worthiness of the buyer is open to question.worthiness of the buyer is open to question.

Cash against documentsCash against documents: In this case, the goods are shipped and the negotiable : In this case, the goods are shipped and the negotiable documents are forwarded to the buyer through a bank and surrendered to him by the documents are forwarded to the buyer through a bank and surrendered to him by the bank in his country on his payment for the goods.bank in his country on his payment for the goods.Until the payment is received from the buyer through his bank, the title to the goods Until the payment is received from the buyer through his bank, the title to the goods rests with the exporter.rests with the exporter.

Documents on AcceptanceDocuments on Acceptance: In this method, negotiable documents are sent through a : In this method, negotiable documents are sent through a bank to the buyer. The buyer signs the documents, accepting liability to pay as per bank to the buyer. The buyer signs the documents, accepting liability to pay as per the terms specified and takes custody of the goods. the terms specified and takes custody of the goods. This kind of payment is offered only to well established buyers who are credit worthy This kind of payment is offered only to well established buyers who are credit worthy and whom the exporter has been dealing with for a long time.and whom the exporter has been dealing with for a long time.

Consignment BasisConsignment Basis: Under this system, the exporter has his own establishment or : Under this system, the exporter has his own establishment or appoints a reliable agent to hold consignment stocks on his behalf abroad, who sells appoints a reliable agent to hold consignment stocks on his behalf abroad, who sells them as and when the demand arises and repatriates the amount.them as and when the demand arises and repatriates the amount.

Export Finance NeedsExport Finance NeedsLetter of CreditLetter of Credit

A letter of credit is a document typically issued by a bank or financial A letter of credit is a document typically issued by a bank or financial institution, which authorizes the recipient of the letter (the institution, which authorizes the recipient of the letter (the "customer" of the bank) to draw amounts of money up to a specified "customer" of the bank) to draw amounts of money up to a specified total, consistent with any terms and conditions set forth in the letter.total, consistent with any terms and conditions set forth in the letter.

Types:Types:

1. 1. Confirmed Letter of CreditConfirmed Letter of CreditA letter of credit, issued by a foreign bank, which has been verified A letter of credit, issued by a foreign bank, which has been verified and guaranteed by a domestic bank in the event of default by the and guaranteed by a domestic bank in the event of default by the foreign bank or buyer.foreign bank or buyer.

2. 2. Commercial Letter of CreditCommercial Letter of CreditA commercial letter of credit assures the seller that the bank will A commercial letter of credit assures the seller that the bank will provide payment for any goods or merchandise shipped to the provide payment for any goods or merchandise shipped to the bank's customer, assuming the seller provides any required bank's customer, assuming the seller provides any required documentation of the transaction and its shipment of the purchased documentation of the transaction and its shipment of the purchased goods.goods.

Export Finance NeedsExport Finance Needs3. 3. Irrevocable Letter of CreditIrrevocable Letter of Credit

An irrevocable letter of credit includes a guarantee by the issuing bank that An irrevocable letter of credit includes a guarantee by the issuing bank that if all of the terms and conditions set forth in the letter are satisfied by the if all of the terms and conditions set forth in the letter are satisfied by the beneficiary, the letter of credit will be honored.beneficiary, the letter of credit will be honored.

4. 4. Revocable Letter of CreditRevocable Letter of CreditAn revocable letter of credit may be cancelled or modified after its date of An revocable letter of credit may be cancelled or modified after its date of issue, by the issuing bank.issue, by the issuing bank.

5. 5. Standby Letter of CreditStandby Letter of CreditIn the event that the bank's customer defaults on a payment to the In the event that the bank's customer defaults on a payment to the beneficiary, and the beneficiary documents proof of its loss consistent with beneficiary, and the beneficiary documents proof of its loss consistent with any terms set forth in the letter, a standby letter of credit may be used by any terms set forth in the letter, a standby letter of credit may be used by the beneficiary to secure payment from the issuing bank.the beneficiary to secure payment from the issuing bank.

Export Finance NeedsExport Finance NeedsAdvantages of letter of credit:Advantages of letter of credit: Once exporter fulfills his obligations, he is assured of payment.Once exporter fulfills his obligations, he is assured of payment. Once the LC is established, the exporter may be reasonably sure that all Once the LC is established, the exporter may be reasonably sure that all

import trade regulations of the buyer have been complied with and that import trade regulations of the buyer have been complied with and that the payment would face no problems from the exchange control the payment would face no problems from the exchange control authorities.authorities.

A commercial bank in India advances pre-shipment finance, such as A commercial bank in India advances pre-shipment finance, such as packing credit, against the letter of credit.packing credit, against the letter of credit.

Parties to the Letter of CreditParties to the Letter of Credit OpenerOpener: The buyer who makes application and on whose behalf the : The buyer who makes application and on whose behalf the

credit is opened is called the opener of the letter of credit.credit is opened is called the opener of the letter of credit. BeneficiaryBeneficiary: The beneficiary is the person in whose favour the credit is : The beneficiary is the person in whose favour the credit is

opened. He is normally the exporter.opened. He is normally the exporter. Opening BankOpening Bank: The bank in the importing country which establishes the : The bank in the importing country which establishes the

letter of credit on behalf of the opener.letter of credit on behalf of the opener. Negotiating BankNegotiating Bank: Usually beneficiary’s bank through which the : Usually beneficiary’s bank through which the

documents are normally negotiated. It is also called the paying bank. documents are normally negotiated. It is also called the paying bank.