Export finance refers to the credit facilities extended to exporters at both pre-shipment and post-shipment stages. It includes loans granted to finance the purchase, processing, manufacturing, or packing of goods destined for overseas markets. Credit may also be extended after the shipment of goods until the realization of export proceeds.

Types of Export Finance

· Pre-shipment Export Finance

· Post-shipment Export Finance

· Export Finance Against Collection of Bills

· Deferred Export Finance

· Export Finance Against Allowances and Subsidies

1. Pre-shipment Export Finance

Exporters are provided with finance for the purchase of raw materials and for processing them into finished products. This finance is extended only when the exporter has received a firm order from the importer, accompanied by an anticipatory Letter of Credit from the importer’s bank. Based on the export order, the exporter’s bank provides funding, which is known as pre-shipment export finance.

2. Post-shipment Export Finance

Once goods are dispatched, the exporter issues a bill of exchange, which the importer must settle. However, payments may take 3–6 months, which can disrupt the exporter’s production cycle. To bridge this gap, the exporter presents the export bill to their bank, which may choose to purchase, collect, or discount the bill, depending on the economic status of the importing country.

Example: If an export is made to the USA against a Letter of Credit, the exporter’s bank may purchase the bill and pay the full value to the exporter. In this case, the bank assumes the risk of the bill, while benefiting from potential currency value gains in a developed market.

3. Export Finance Against Collection of Bills

When goods are exported to different countries, exporters can obtain loans against bills sent for collection. Banks often provide this type of finance, and in case of default, a guaranteeing company may indemnify up to 80% of the defaulted amount.

4. Deferred Export Finance

This facility allows importers to purchase high-value goods through hire purchase financing or lease financing. There are two main types of deferred export finance:

Supplier’s Finance: The exporter’s bank finances the exporter, who then sells goods to the importer on an installment basis. The exporter receives the full payment upfront, while the importer pays in installments directly to the bank.

Buyer’s Finance: The buyer (importer) receives credit under a line of credit from the exporter’s bank, enabling the exporter to ship goods while the importer repays the bank overtime.

Export finance against allowances and subsidies:

Exporters are given subsidies by the government so that they can sell the goods on reduced price to importer. For example, cash compensatory support is a subsidy given to the exporter by the government whenever there is an increase in expenditure, due to reasons beyond the control of the exporter, such as increase in transport cost or wage of the laborers.