Export Credit¶
Export credit is a specific type of financing that is tailored to support international trade transactions. Unlike general credit facilities that cater to a broad range of needs, export credit is specifically designed to facilitate the production, shipment, and sale of goods or services to overseas buyers. Here's how export credit differs from other types of credit:
Purpose of Export Credit vs. Other Credits¶
- Export Credit:
- Primary Objective: To support exporters by providing them with working capital, financing for pre-shipment and post-shipment activities, and credit guarantees.
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Use: Specifically aimed at mitigating the risks associated with international trade, such as customer non-payment, political instability, or currency fluctuations.
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Other Credits:
- Purpose: These credits can be used for domestic financing needs, capital investments, consumer purchases, or specific business or individual financial requirements.
- Scope: Generally broader and not specifically tailored to the needs and risks of international trade.
Distinction Between Pre-Shipment and Post-Shipment Finance¶
To further understand export credit, it's crucial to distinguish between the two main types: pre-shipment and post-shipment finance. Each serves a unique function in supporting export activities.
Pre-Shipment Finance¶
- Meaning: This type of finance is provided to exporters for procuring raw materials, paying for labor, and covering costs associated with producing, packaging, storing, and transporting goods intended for export.
- Objective: To ensure that exporters have the necessary funds to complete the production and preparation of goods for export without financial strain.
- Eligibility: Can be availed by the export company itself or a company exporting goods through export houses.
- Source of Repayment: Typically, the proceeds from the export contract once the goods are sold.
Post-Shipment Finance¶
- Meaning: This finance is extended to exporters after the shipment of goods, against the invoices and shipping documents.
- Objective: To provide liquidity to exporters right from the date the export documents are submitted to the bank until the payment is realized from the buyer.
- Eligibility: Generally available to the exporter himself or the person in whose name the export documents are transferred.
- Source of Repayment: Proceeds from the sale of the exported goods.
Conclusion¶
Understanding the specifics of export credit, including the differences between pre-shipment and post-shipment finance, is essential for exporters to effectively manage their cash flow and reduce the risks associated with international trade. By leveraging these specialized financial products, exporters can enhance their competitiveness in the global market.
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