[SHANLAX INTERNATIONAL JOURNAL OF MANAGEMENT] February 1, 2016

AN OVERVIEW OF PAYMENT METHOD AND ARRANGING EXPORT FINANCE

1. Mr. S.Thowseaf (Ph.D. Research Scholar), 2. Dr. M. Ayisha Millath (Research Supervisor, Assistant Professor),

Alagappa Institute of management, Alagappa University, Karaikudi - 630003

Email ID- thowseaf786@gmail.com, Mobile. No- +91 7358167123

Email ID- ayishamillath05@gmail.com, Mobile. No- +919842144984

ABSTRACT

Export trade is a two way street, no matter trade commodity moving along one way, other
way by default is money. Finance is an pre-requisite for the effective export functioning. Credit,
payment method, terms and conditions plays a vital role in international business. There are
many number of options available to avail export financing also, the complexity involved in
acquiring export finance which are technically called Pre-shipment finance and Post-shipment
finance is comparatively less. Coupling awareness and knowledge of export financial risk with
appropriate risk strategy, will greatly determine the failure or success of the firm and will largely
shape firms financing options in export business. Export financing and contract negotiation are
important, but at the end of the day, it must get it paid for the work done, hereby payment
method plays a crucial role. Ever growing population along with its respective demand for
commodities and increasing competition among export firms have forced parties involved in
international trade negotiate and mutually come to payment term favoring involved parties, but
still fraud in relation to payment terms are still in existence due to lack of exporter knowledge in
start up phase. This paper is exploratory work using secondary data, the objective of the study is
understand the options available to avail export financing and evaluate payment method
descriptively and suggest risk mitigation method.

Keyword : Export Financing- Per-Shipment Credit and Post-Shipment Credit,

Payment Methods in International Trade.

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1.1 INTRODUCTION

Export finance had been a requisite for strengthening productive capacity of the firms and
economy undisputedly. Either it is developed or developing nation, finance is acting as a push
factor for exporting capital and manufactured goods at comparatively high price with long
payback period (V. R. Panchamukhi, 1991). Export financing are opted for following reasons; to
execute export order, for feasibility analysis of foreign market, to develop product and service
according to foreign market requirement, to optimize and mitigate risk involved in operations
and short term financing to run business due to extended payment terms given to the buyers (P.
K.Keshari). The export finance thereby, can be classified into to two types namely; Pre-shipment
finance and Post-shipment finance. The major challenges faced by the export industries in recent
trends are; longer payment time frame lend to buyers, exchange rate risks, costly dispute
settlement and legal recourse complexity. In India exporter financial requirement are met
through; Commercial banks authorized to act as foreign money exchangers and EXIM (Export
Import) Bank of India. The main governing bodies in relation to export fianc in India are; RBI
(Reserve Bank of India), Trade and Exchange control regulation and International Chamber of
Commerce (Jain, 2014). Apart export financing, payment terms are the critical factor to be
evaluated in export business, this is because, it decides the profit or loss associated particular
international trade transaction. Among many types of payment terms, In India most commonly
followed payment terms are; Payment in Advance, Open Account, Consignment Payment, Bill
of Exchange and Letter of Credit. The payment negotiation are often decided by; the proper
terms and condition between the exporter and importer, regulation and rules by RBI, fiscal and
monetary policies of Indian Government and Political situation in trading countries. The
payment terms are viewed complex in export due to situation imposed to exporter, though there
exist few option available in payment terms, factors affecting payment terms are many; few
among them are; Nature of export products, buyers creditworthiness, Exchange rates,
Competitors, economic situation of the buyer country, Cost of export orders, Financial position
of the exporter and the relationship with importer. The risk mitigation for export financing and
payment terms are the major concern of exporters in India for years long. This paper is made out
of exploratory research using secondary data, the major objective of the paper is to comprehend
the export finance arrangement, payment terms and its risk mitigation method.

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2.1 EXPORT FINANCING IN CONTEXT TO INDIA

The apex bodies arranging export finance in India are EXIM ( Export Import bank of
India) and ECGC ( Export Credit Guarantee Corporation). These bodies are assigned with the
responsibilities to provide finance, assist export and promote export in India. Export finance in
India are classified into two types namely; Pre-shipment Finance and Post-Shipment Finance.

2.1.1 Pre-Shipment Finance

Pre-Shipment finance is the credit prearranged to exporter before the shipment of goods
to execute the export order. Pre-shipment Finance is known as packing credit in India. Packing
Credit are granted to exported for; raw material purchasing, export processing and packing of
goods for shipment (Balagopal, 2011). All types of exporters including; Manufacturer exporter,
merchant exporter, export house and supplier to export house can avail pre-shipment finance.

2.1.1.1Documentary Evidence To Avail Pre-Shipment Credit

For direct exporter, documents such as; export contract, irrevocable L/C (Letter of
Credit), original proof of message exchanged between buyer and exporter. While for Indirect
exporters performing export through export house requires document such as; A letter certified
by export house in favor of concern person (Subash Sasidharana, 2014). Apart, primary
documents such as; Copies of Income tax and Wealth tax of past three years, MoA
(Memorandum of Association) and AoA (Article of Association) of the company, Company
incorporation certificate, Copy of IECN (Importer Exporter Code Number) allotted by DGFT
(Director General of Foreign Trade), Copy of Valid RCMC (Registration Cum Membership
Certificate) and relevant shipping document if any is demanded.

2.1.1.2 Pre-Shipment Credit Amount And Period Of Credit

Banks are given freedom to determine and sanction amount to the exporter, in most case
need based finance is provided, which is in-turn determined by the nature of order, commodity
and exporter creditworthiness (Lall, 1999). With specific concern to packing credit, amount of
finance is determined by; amount of export orders, credit rating of the exporter, IPRS
(International Price Reimbursement Scheme) and DBK (Duty Drawback).The maximum
duration of packing credit is 180 day, with ECGC guarantee 90 days extension is provided.

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2.1.2 Post-Shipment Finance

Post shipment Finance refers to the credit extended to exporter to meet the working
capital requirement after the goods are shipped to the buyers. It is generally issued on submission
of commercial documents of shipment of goods and negotiation terms with importer to
commercial bank (Prabhu, 2013). Like Pre-shipment credit merchant exporter, manufacturer
exporter, export house, trading house and manufacturer supplying good to export house can avail
for post shipment finance if needed.

2.1.2.1 Documentary Evidence To Avail Post-Shipment Credit

If the concern person is a direct exporter then he may need to produce shipment
documents and necessary documents subject to which the credit can be provided (B.M. Wali,
1993). In-case if it is an indirect exporter than, he may asked to produce a letter from the concern
export house also an acknowledgement letter from the export house stating that - the export
house will not avail post-shipment credit towards the same.

2.1.2.2 Post-Shipment Credit Amount And Period Of Credit

100% of the invoice value of the goods exported can be climbed under post-shipment
finance. Through commercial bank lends loan up to 10 crore. EXIM on other end provides
financing solution up to 50 crore. For the loan amount more than 50 crore clearance from EXIM
representatives, ECGC and RBI is required. Period of credit for post-shipment finance is
classified into three types namely; short term, medium term and long term. Short term credit are
given by commercial banks, generally 90 pay back credit is given to the exporter. Medium term
loan is given by both EXIM and commercial bank whose credit period ranges from 90 days to 5
years . While long term post-shipment finance are provide only to export capital goods and for
turnkey projects having significant scope, whose period of credit ranges from 5 years to 12 years.

2.1.3 Role of RBI in Indian Export Finance

RBI is the central banking institution of India, it performs critical task for silky
functioning of export in India, some of the RBI functions supporting export includes;
administration of interest rate, exchange rates, improving credit delivery system and refinance
facility to exporters, which are most important function in export finance (B.M. Wali, 1993).

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3.1 METHODS OF PAYMENT TO EXPORTER

In today's global competitive market place, one need to lend attractive sales term and
payment method to have edge over competitor in the same industry. Getting paid for the work
done is also an ultimate objective of every firm belonging to export or any other. Decision on
payment methods in export decides the level of risk the firm getting associated with overall work
done, hence right knowledge and selection of payment method decides the not only the success
also the survival of the firm in industry (Soundaian, 2011). Commonly used payment method
includes advance payment, L/C, collection through bank, open account and payment under
consignment sale.

3.1.1 Advance Payment

Under this payment method, the importer pays the exporter prior before shipment of
goods. The payment made here are either bank draft or electronically made. The complexity
involved in Advance payment is minimal, also the risk involved is less for the exporter
irrespective of the time it is delivered. Though it lends high risk to the importer, it provides an
opportunity to the importer against exchange rate risk.

Risk mitigation : Although advance payment option is rare and shifts burden totally towards
importer, there exists a possibility of importer calming total amount if the agreed terms and
condition not met, hence it is sole responsibility of the exporter to analyze his firm potential and
capacity in executing particular order (Achor, 2015). In most cases bank guarantee against
exporter is asked form importer end to extend advance payment, thereby ethical and transparent
function is expected from the firm towards government and importer.

3.1.2 Letter of Credit (L/C)

L/C is been used for years in international trade and this payment method is beneficial to
both importer and exporter (tradelogistics.co.za, 2015). This instrument is considered to be more
secured form of payment method for both importer and exporter. In L/C the issuing bank will
promise to release the payment once all the terms and conditions stated in the agreement are met.
With respect to L/C the operation complexity is high also the cost in terms of transaction is quite

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high. L/C is further classified into many types, namely; Revocable L/C, Irrevocable L/C,
Confirmed L/C, Back to Back L/C, Assignment L/C and revolving L/C.

Risk mitigation : L/C is the most secured form of transactional payment method, provided terms
and conditions stated are meet, there exists a possibility of very rare denial after the goods are
send, thereby third party inspection prior before the goods are send will always holds good.

3.1.3 Collection Through Banks

This payment method involves remitting bank sending documents to the importer bank to
receive the payment. The complexity involved in this type of payment term is medium, similarly
cost wise, it is moderate (Soundaian, 2011). Unlike L/C it possess moderate risk comparatively,
this is because; incase of non-payment legal work might be costly.

Risk mitigation : It is better to appoint a representative known as "Case in Need" in case of

dispute due to non payment or any problem contradictory to terms and conditions
(http://trade.gov, 2015). The primary mitigation is to exchange required documents against
payment through third neutral party.

3.1.4 Open Account

An open account transaction involves exporting goods and giving the importer a credit
facility ranging for 30 to 90 days after the arrival of goods (www.export.gov, 2015). This the
most advantageous factor for importer consequently, makes the exporter to operate at highest
risk.

Risk mitigation : Indian exporter faces significant amount of risk associated with open account
transfer, In case of nonpayment exporter have to complain with supporting documents legally
through local agency, this in turn is also a expensive process. It is strongly recommended to
create papers and get acknowledged with the parties involved, this creates a awareness and
reduces risk associated with open account transfer.

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3.1.5 Payment under Consignment sale and other types of payment methods

When goods are shipped in basis of consignment basis or other methods the ownership of
the goods even after reaching the importer lies with exporter, only after the full payment the
ownership changes (Jain, 2014). This is regardless of other payment method named as CAD
(Cash Against Delivery) or DA ( Document on Acceptance), the procedure is same as open
account and possess substantial risk possessed by the open account, thereby following similar
mitigation method as that is followed in open account payment method will serve good to
exporter . It is strongly suggested to look for secured payment terms such as L/C, through banks
and advance payment for exporters over other payment options in export business as, there lies
minimal security over the payment to be received.

4.1 CONCLUSION

The export financing schemes for exporter in India reasonably liberal. The amount of
finance sanctioned and its corresponding rate of interest and credit period is significant, no other
industry avail this benefits. Whether it is short, medium or long-term, there exists basic
procedural formalities to attain export financing from financial institution of India. Unlike any
industry, exporter are provided refinancing facility for the products to be exported. Financial
function in export department possess much more function, which are critical in deciding
survival and success of the export firm, this includes; decision on export insurance, strict
adherence domestic and host government, banking, analysis on payment methods and INCO
(International Commercial) terms. Every export operation is initiated with an ultimate objective
to attain payment for the work done, security over payment receivable will ensure effective
export order execution. Though there exists many types of payment method L/C and collection
through bank provides security to either end i.e. exporter and importer. Cash in advance may
look more favorable to exporter, but the chance of getting this kind of payment is negligible in
current era. Insight on cost of transaction using L/C and through commercial bank, commercial
bank can prove to better option, while on security basis L/C is best option. Other payment option
may have cost advantage and substantial risk on receiving payment. Formulating agreement
between importer and regulating internal organizational operations governing; Rules and
regulation laid down by RBI, Monetary and fiscal policy of the government, political situation of

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domestic and host country and law affecting payment mechanism in foreign country will lay
strong platform to avoid export financing and payment problems for exporters.

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