The Micro, Small, and Medium Enterprises (MSMEs) contribute approximately 8% to India’s Gross Domestic Product (GDP). These businesses offer over 6,000 products and their GDP contribution is expected to reach 22% during the next three years.
Almost 60% of the SMEs are unorganised and employ 70% of the population. The growth of these businesses is crucial for the overall economic growth of the country. Although the SME sector contributes to the exports, they face financial constraints and operational struggles.
As an impetus to help the SMEs grow, several institutions like Kotak Bank offer export finance to these businesses. Here are the basic types of export financing options available for the SMEs:
1. Pre-shipment export finance
It is also known as packing credit and is a type of working capital funding offered by institutions prior to the shipment of the goods. These loans enable the SME exporters to fund pre-shipment operational costs. This money may be used for various purposes, such as:
- Payment for raw materials and other inputs
- Import domestic materials to produce export goods
- Assembling the products
- Storage of completed products in warehouses prior to shipment
- Packaging and labeling goods
- Payment for documentation
- Pre-shipment inspection charges
This type of export credit is offered by banks only when the exporters receive confirmed orders from the exporters along with an anticipatory Letter of Credit (LC) from their banks.
2. Post-shipment export finance
After shipping the products, the exporters require working capital to sustain the business until payment is received from the importers (which may take between 3 and 6 months). Institutions like Kotak Bank offer export financing for the SMEs to meet some expenses like:
- Payment to agency and distribution services
- Promote their companies and products in international markets
- Payment to shipping agents, customs, and port authorities
- Freight, export duty and taxes, and other payments
- Marine insurance and Export Credit Guarantee Corporation (ECGC) premium
- After-sales expenditure
- Participation in domestic trade fairs and exhibitions
Depending on the economic condition of the importers’ countries, the banks may collect, purchase, or discount the exporters’ bills.
3. Funding against collection of bills
When goods are exported to various countries, funding may be availed from institutions against the bills sent for collection. Institutions like the ECGC provide guarantees to the lenders, which acts as an encouragement to fund SME exporters. While offering trade finance against collection of bills, the banks consider the Free on Board (FOB) invoice value, which includes all expenses that are incurred until the goods are kept in the ship. Cost, Insurance, and Freight (CIF) invoices are not funded by most institutions.
4. Deferred export finance
To enable importers to acquire expensive products, lease or hire purchase finance is offered by the banks. Deferred export finance is available as two types:
- Supplier’s finance: The exporters’ banks fund them to enable sales on an installment basis to the importers. The exporters receive the entire sales value and importers directly pay the installments to the lenders.
- Buyer’s finance: Under this arrangement, the buyers receive line of credit from the exporters’ banks.
5. Funding against subsidies and allowances
The government offers subsidies to allow exporters to sell goods at competitive prices. Similarly, allowances like duty drawback are available for growing exports. Suppliers of goods within free trade zones to foreign exporters are provided finance.
All the above types of international trade finance assist the SMEs in streamlining their operations. Overcoming operational difficulties is vital for the growth of this sector, which plays an important role in the economic development of the country. Banks are adopting various measures to make funding available to this sector, which is still facing challenges in accessing funds.
Another aspect that helps in overcoming operational difficulties for SMEs are financial assistance at the time of need and what better than the Kotak SME group, they have an array of products in their ensemble and all you need to do is select the right product that will help your business thrive and you also get to customise it accordingly. Propel your business forward by availing solutions from the Kotak SME group.
