MSME Financing Series -1 Export Bill Discounting

When we talk about MSME financing options – there are plenty of options available in the market for micro, small and medium enterprises. In this series, we will be talking about export bill discounting facility. 

Export Bill Discounting/Facility  

Export bill discounting is considered as a type of financing where an exporter submits export invoices to banks or NBFCs for discounting purposes. After submitting the export invoice, banks/NBFCs release funds to exporters after the dispatch of goods. Export bill discounting facilities are provided by several banks, NBFC, and fintech companies in India. 

Export bill discounting is a collateral-free working capital facility for exporters. Generally, all in cost comes in the range of 4.50% - 7.50% per annum. However, this facility is available in foreign currency. 

Below listed are the steps to avail export bill discounting: 

• First of all, exporters will approach to Bank/NBFC/fintech for export bill discounting facility for a particular buyer.
• Following that, factoring businesses will check the credentials of international buyers and the availability of insurance against this buyer.
• If the buyer is approved by insurance cover companies than the Bank/NBFC/fintech/factoring companies will consider the exporter proposal and sanction a credit limit to the exporter.
• The financing company will ask the exporter to arrange a consent letter from an international buyer to finance company favour that buyer will make direct payment to financing company after discounting of bills once started.
• Exporters will get payment on shipment of goods.

Benefits to Exporters  

There are many benefits to export bill discounting in trade especially in international trade. This practice allows export businesses to get paid quickly upon the shipment of their goods to a buyer. Instead of waiting for a buyer to get the shipment, process it, and sell it, then get paid upon it, an exporting business just has to furnish customs and shipping details in order to receive payment.  

This practice enables businesses to generate more working capital quickly so that this money can be used to continue growing and taking care of the daily running of a business.  

• Exporters will get payment guidance on shipment of goods
• Export bill discounting can be availed in the form of unsecured loan  
• This facility is with recourse or without recourse which means if this facility was without recourse, then if any default is made by the international buyer, then the financial company will not recover from exporter. So, exporter risk for payment is finished and export bill discounted. On the other hand, if this facility is with recourse, then the exporter is liable to pay in any case of an international buyer's default.

Tips: Export bill discounting is suitable for exporters when the exporter does not have any collateral security. It will enhance the exporter working capital facility without additional collateral security.  
  

Case Study

For example, let's assume that a exporter is having an export facility of Rs.10 Cr with a bank. The exporter has a collateral value of Rs.10 Cr. He had taken a pre-shipment for 90 days, post shipment credit for 90 days with letter of credit. Now, banks refuse to reduce or increase credit facility due to shortage of additional collateral security. Otherwise, the borrower is eligible to get additional credit facility.  

• Under this situation, exporters can avail an export bill discounting
• Exporters total working capital cycle is 180 days
• Based on the current scenario, we would recommend that exporter to avail of pre-shipment credit from the existing bank and use the post-shipment credit/export bill discounting with the factoring company. By doing so, export pre-shipment will be paid by the factoring company and at the time of shipment of goods, the pre-shipment credit facility will be free to utilize again at the end of the 180 days. In this way, the total credit facility will be 10 Cr from the existing bank and 10 Cr from factoring companies. Overall, the total credit facility will be 20 Cr with the same value of the collateral security.

In the above-mentioned way, one can able to opt for such export bill discounting facility.  

Author Bio

Name : Vikas Jain

Qualification : ca_practice 🎓

Company : Financeseva

Location : New Delhi, Delhi (DL), India

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