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Finance for Exports of Projects and Capital Equipment 

  • 16-May-2022
EXIM - Finance for Exports of Projects and Capital Equipment 

Over the past few years, Project exporters of India have reached various contracts by exploring their creativity and technology capabilities.  

  

To strengthen them, several financial programmes has launched by financial institutions and government bodies; in which EXIM Bank is one of the prime movers in appreciating project exporters of India.   

  

It has empowered Indian enterprises to get contracts across various geographics over 2 decades.  

  

Exim Bank provides financial assistance to project activities in engineering, procurement, and construction (mechanical, electrical, civil or instrumental).   

  

It includes the provision of specific equipment-related supplies, building materials, consultancy, technology transfer, construction, design, and engineering in detail.   

  

It covers new projects and existing plants or processes that require additional support in processing such international competitive bidding: including multilaterally funded projects in India.  

  

Project Exports (PE) exhibits the technical maturity and industrial capabilities of India are as follows:  

  

CIVIL ENGINEERING AND CONSTRUCTION PROJECTS  

Civil engineering deals with designing, constructing, and maintaining a physical environment. It includes airports, roads, dams, roads, canals and buildings.  

  

TURNKEY PROJECTS  

A turnkey project is designed, developed and equipped with all facilities by a company under a contract. It is handed over to a buyer when it becomes ready to operate the business.   

  

A turnkey project is one of the most unique modes of carrying out international business. Under a contract, the turnkey project is designed developed, supplied with equipment, civil construction, commissioning plants and transmission power and distributed with all facilities by an organization.  

  

  

TECHNICAL AND CONSULTANCY SERVICE CONTRACTS  

This type of PE involves high-end skills and personnel training.   

It involves the implementation of projects, management contracts, supervision of erection of plants,finance and accounting system.  

  

SUPPLIES  

It involves the export of capital goods and industrial manufacturers.  

Significantly, the supply of stainless-steel slabs and ferrochrome manufacturing equipment, diesel generators, compressors and pumps are the common examples of supply contracts.  

   

India Exim Bank has been facilitating exports of projects and capital equipment from India. Major competitive advantages that the Bank offers to its clients are:  

  

Strong institutional linkages including correspondent relationships in almost all geographic.  

A better understanding of needs of project exports and country insights.  

  

India Exim Bank offers the following bouquets of financing programs to promote exports of projects and capital equipment:  

  

Funded Facilities  

Buyer’s credit - Buyer's credit is a short-term loan facility extended to an importer by an overseas lender such as a bank or financial institution to finance the purchase of capital goods, services, and other big-ticket items.  

  

Credit Line to Banks/FIs - A credit line is a flexible loan option offered by financial institutions to individuals and corporate entities. Extends finance to overseas banks/FIs to on-lend to its clients to procure goods and services from India on deferred credit terms.  

  

Export Project Cash Flow Deficit Finance (EPCDF) - Enable project exporters to finance the temporary deficits in their cash flow during the contract execution period. Structured disbursement and repayment schedules to cover medium to long-term requirements.  

  

Supplier’s Credit - Supplier credit is an agreement in a commercial contract under which an exporter will supply goods or services to a foreign buyer on credit terms. The importer, to whom the loan is issued, is the buyer of goods, while the exporter is the seller.  

 The following diagram is an example of a supplier credit structure: 

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Capital Equipment Finance Programme - Under this type of finance programme any project exporters for procurement of capital equipment can use execution of varied contracts secured by them.  

  

Eligibility:  

  • Any Indian manufacturers and project exporters can use such type of credit facilities to support export trade financing.
  • Finance for export facilities covers Indian capital and other engineering goods.

  

To use such facilities, any of the following securities can be provided:  

  1. Cash collateral
  2. Corporate guarantee
  3. Shareholders and/or Director's guarantee
  4. Landed property
  5. Charges applicable on fixed or floating assets
  6. Any insurance policies, contract proceeds, rights
  7. Any other security is acceptable to the Bank

  

Non-Funded Facilities  

  • Bank Guarantees
  • Letter of Credit
  • Trade Finance Facilitation Programme
  • Risk Participation

  

Bank Guarantees for Execution of Contracts - Indian companies can obtain non-funded facilities to finance and facilitate the execution of export contracts or deemed export contracts.  

  

Bid Bond Guarantee – Issued for bidding for the project/contract as per the tender requirements.  

  

Performance Guarantee – Issued following the letter of award/notification of award for ensuring the performance of the project.  

Under the performance guarantee, a beneficiary gets 5% to 10% of the contract value. This is valid until the completion of the maintenance period.  

  

Advance Payment Guarantee (APG) – APG aids secure a project mobilization advance as a percentage of 10% - 20% of the contract value.  

  

This type of guarantee is availed to project exporters and generally recovered through the progress payment during project execution. Issued after signing of the contract during the execution of work.  

  

Mobilisation Advance/Procurement Guarantee – Issued during the contract execution period of releasing the mobilisation advance under the contract for procurement of raw material.  

  

Retention Money Guarantee - With retention of money guarantee, one can get the payment through a client before issuing of project acceptance certificate or final acceptance certificate.  

  

  

Added Advantage of EXIM  

  1. Knowledge of exporter's requirements
  2. Capability to leverage extensive international networks
  3. Lending in both INR and foreign currency
  4. Competitive rates of interest and flexible repayment schedule

 

Why Export Finance is required?  

Before deciding on how to source export finance, it is required to identify why exactly you need to fund. There might be various reasons why you need an export investment:  

  

Set up a New Export Business 

For establishing a new export business, you will need financial assistance. As at the early stage, each enterprise requires finance at a certain stage.   

 

Whether you want to set up a manufacturing unit, renovate and modernize your business.   

  

  

For Business Expansion  

One of the other reasons for fund requirements can be a business expansion for which you need to arrange large-scale finance.  

  

For example, if you want to expand into a new export market or set up additional offices to cater for new export lines.  

  

For Working Capital  

Expanding a business is not an easy task, managing day-to-day operations require working capital.   

  

You need funds to accommodate the buyer’s credit period, accessible through loan products such as pre-shipment finance. Having enough cash enables you to compete in the market.  

  

When Do You Need Export Finance?  

As examined above, as an exporter; you may need export credit facility at various stages of your business including:  

  • Pre-Shipment
  • Post-Shipment
  • Finance against the collection of bills

 

Types of Export Financing 

  

The financial requirements depend upon the types of goods to be executed and based on the overseas buyers.   

  

Typically, the amount varies depending on the requirement of short-term or long-term finance.   

  

This type of financial support is offered by lending institutions for export-related purposes. The following are the common tools that you can use to finance your export-related activities.  

  

  

Pre-Shipment Finance  

Pre-shipment finance is given to the exporter who needs funds before this shipment of products or goods. These funds are used to purchase raw materials, process raw materials into finished goods and package goods.  

  

1.  Packing Credit: You can get a pre-shipment credit facility against an export order received from the importer in the form of packing credit.  

Once the funds are received from an overseas buyer, the export packing credit amount concerned should be adjusted, and the loan will be closed against that order.  

  

2. Business Loan: Borrowers can use funds to purchase raw materials or to undertake the manufacturing of their products.   

  

Post Shipment Finance  

Once the goods are shipped to the importer, the exporters should raise an invoice that shall be paid by the importer.   

  

These activities need to be taken place 3 – 6 months earlier than receiving payment by the exporter; meanwhile, in the duration gap for production, the exporter will present the invoice to the lending institution to avail finance for goods exports.   

  

  • It is used to pay the wages or other services
  • To pay for cargo/shipping chargers
  • To pay for advertising in an overseas market
  • Generally, the interest rate on post-shipment finance varies from at least 90 days and can be extended on the applicant profile

  

  

1. Bill Discounting and Invoice Factoring:   For a faster liquidation, the beneficiary can approach any lending institution and present your invoice. The bank can purchase the invoice or collect the invoice or even discount the bill.  

  

For instance, to get a benefit under invoice factoring beneficiary can get the invoice with certain documents to the concerned bank and get advances up to 80% of the invoice value within a short period.  

  

2. Finance against the collection of bills:   Lending institutions agree to finance export invoices which are repaid by guaranteeing companies in case of default.   

  

These banks give financial assistance up to 90% of the FOB (freight-on-board) value of the exports.  

 

3. Letter of Credit Discounting:   Lending institutions provide finance against the letter of credit (LC) as it has inborn security in the form of confirmed LC that the payment will be repaid by the issuing bank in case of default.  

  

4. Supplier's Credit & Buyer's Credit:   Another way to finance export invoice are the medium of supplier's credit wherein the exporter’s bank finances the exporter with the full amount of the invoice and the importer can make payment in installments to the exporter’s banker.  

  

While on the other hand a buyer's credit is extended to an importer by an overseas lender such as a bank or financial institution to finance the purchase of capital goods. On behalf of this programme, the overseas buyer can opt for a letter of credit in favour of the Indian exporter to import goods and services on deferred payment terms.  

  

  

Export finance against allowances and subsidies:  

The government provides subsidies to the exporters to allow them to sell the goods at a nominal price to importers.  

There are various other reasons to obtain export credit such as:  

 

  • To launch a new export business with secured financial support
  • To fulfill the business working capital requirements.
  • To expand your business in the global market.

 

Why is Export Finance Necessary?  

  

Export finance helps the exporters to mitigate the risk of default of payment and fill the gap between manufacturers and overseas suppliers.   

  

Might the exporters agree on the payment terms and conditions of the importer and ship the goods overseas but carries the payment risk that is received later on.  

  

  

Typically, export credit allows the businesses to sell their goods and services to other countries and enables them to get access to working capital requirements before the importer pays the amount for the purchased products.  

  

Who Can Provide Export Finance in India?  

There are several banks non-banking financial corporations and foreign trade-specific lenders that offer financial support to exporters.  

  

The Exim Bank of India provides finance exports, buyer’s credit, corporate banking products, line of credit, project-based finance..etc.  

  

Lending institutions include government banks, private banks, foreign banks, regional rural banks, certain cooperative banks...etc. It includes a line of credit, foreign currency credit, pre-shipment or post-shipment finance, credit against the bill, deemed export..etc.  

  

Other non-banking financial institutions (NBFCs) offer more specialized export financial services such as bill discounting, buyers credit, line of credit, working capital...etc.  

  

You can approach Financeseva to avail finance for exports of projects and capital equipment. Apart from export finance, there are various types of financial solutions provided by them be it a personal loan, home loan, business loan, working capital requirements and much more.   

Also Read: How to make MSME credit through supply chain finance

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