EXPORT FINANCE • Financing of foreign trade more complicated due to the separation of buyer and seller by long distances, differences in currencies, regulations and varied needs. • Various agencies like EXIM Bank, commercial banks, SIDBI, ECGC are providing useful services to facilitate foreign trade.
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Capital goods, plant and machinery, industrial manufactures,consumer durables and any other items eligible for beingexported under the 'Exim Policy' of the Government of India.
General
• Exporters are advised to check with Exim Bank beforefinalizing the contracts with the buyers, details of service feeand other charges, if any, payable by the exporters on thecontracts to be covered under the relative LOC.
• “factoring means an arrangement between a factor and hisclient which includes at least two of the following services tobe provided by the factor; i) finance, (ii) maintenance of
accounts, (iii) collection of debts and (iv) protection againstcredit risk
Factoring is the purchase of export receivables (with or without
recourse) on an ongoing basis
• Management, collection and administration of export receivables is
taken over by the factor• Finance upto 90% of the export receivables
• Available from EXIM bank, Can factors, HSBC factors etc.
• Usually export and import factors belong to a formalchain of factors with well-defined rules governing theconduct of business.
• Import factor provides a link between export factorand the importer and serves to solve the internationalbarriers like language problem, legal formalities andso on. He also underwrites customer trade creditrisks, collects receivables and transfers funds to the
export factor in the currency of the invoice• Functions of factors are divided between export
• Advance and Maturity Factoring Advancepaid against invoice where as in maturityfactoring payment is made against guaranteeor collection of receivables
• Full Factoring Disclosed and Undisclosed
Factoring Name of the factor is disclosed inthe invoice by the supplier/client asking thecustomer to make payment to the factor
• It denotes the purchase of tradebills/promissory notes by a bank/financialinstitution without recourse to the seller.
• The purchase is in the form of discounting thedocuments covering the entire risk of non-payment in collection. All risks and collectionproblems are fully the responsibility of thepurchaser (Forfaiter) who pays cash to sellerafter discounting the bills/notes.
• Exporter enters into a fortaiting arrangement with a forfaiterwhich is usually a reputed bank including exporter’s bank
• Exporter sells the availed notes/bills to the bank (forfaiter) at a
discount without recourse.• The agreement provides for the basic terms of the arrangement
such as cost of forfaiting, margin to cover risk, commitmentcharges, days of grace, fee to compensate the forfaiter for lossof interest due to transfer and payment delays, period of
forfaiting contract, installment of repayment, usually bi-annualinstalment, rate of interest and so on. The rate of interest ordiscount charged by the forfaiter depends upon the terms of thenote/bill, the currency in which it is determined, credit rating ofthe avalling bank, country risk of the importer etc