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Buyers Credit Digest

Buyers Credit Digest
Buyers Credit Digest
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Buyers Credit Digest 66 Buyers Credit Digest Blog
Saravana Bhaskar Oct 25, 2017
Buyers Credit Digest

Understanding EEFC Accounts

EEFC Account: EEFC Account or Exchange Earners Foreign Currency Account, is an account in the foreign currency denomination with an AD Category - I bank. It is a facility extended to the exporters/software companies or individuals who receive foreign currency. 100 % of their foreign exchange receipts can be received into their EEFC account.An EEFC account can only be opened as a current account, hence interest isn’t payable on the EEFC accounts.As mentioned earlier, 100% foreign exchange earnings can be credited to the EEFC accounts, all the credits accumulated in the account during a calendar month should be converted into Indian Rupees on or before the last day of the subsequent calendar month. However, if the exporter has some future payment commitments like import payments or buyer’s credit settlement, EEFC balances can be retained in the account beyond the last day by submitting a request letter to the respective bank along with the proof on the future payment dues.                                                                                                                                                                                                                                                                                                            Permissible credits to EEFC account are:Any inward remittances can be credited to EEFC account apart from foreign currency loans, foreign investments.Advance remittances received towards export of goods or services.Payments received in the foreign currency by a firm in the Domestic Tariff Area for the supply of goods to a company in the Special Economic Zones (SEZ).Inward remittances received by an exporter from an account maintained with an authorized dealer for the purpose of countertrade. (Countertrade is an arrangement involving adjustment of value of the goods imported into India against value of goods exported from India in terms of the Reserve Bank guidelines).Professional fees including directors’ fee, consultancy fee, lecture fee, honorarium and other earnings received by a professional for providing services in his individual capacity.Re-credit of unutilized foreign currency earlier withdrawn from the account.The disinvestment proceeds received by the resident account holder on conversion of shares held by him to ADRs/GDRs under the Sponsored ADR/GDR Scheme permitted by the Foreign Investment Promotion Board of the Government of India.Permissible debits into EEFC account are:i) Outward Payments towards permissible current account transactions permitted as per Foreign Exchange Management (Current Account Transactions) Rules, 2000] and capital account transactions permissible as per Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000].ii) Any payments in foreign currency towards the purchase of goods from a 100 percent Export Oriented Unit or a Unit in (a) Export Processing Zone or (b) Software Technology Park or (c) Electronic Hardware Technology Parkiii) Payment of customs duty in accordance with the provisions of the Foreign Trade Policy.iv) Trade-related loans, provided by an exporter to his importer outside India, subject to compliance with the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.v) Payments to a person resident in India for the supply of goods/services including payments for airfare and hotel expenditure.EEFC balances can also be hedged against any foreign exchange fluctuations.
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Understanding EEFC Accounts

Understanding EEFC Accounts

Kranthi Tilak Reddy
EEFC Account: EEFC Account or Exchange Earners Foreign Currency Account, is an account in the foreign currency denomination with an AD Category - I bank. It is a facility extended to the exporters/sof...
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Exporter's Understanding on Bill Discounting and Bill Negotiation

Most of the times, we would hear our working capital bankers discussing Bill Discounting or Bill Negotiation on our export bills, although, the outcome of both the products are one and the same. It ensures the realization of export bills along with proceeds of the exports into your account. As an exporter, you get money for the completed exports irrespective of it being bill discounting or bill negotiation.Export Bill Discounting: Bill Discounting takes place generally for DA bills where there is an USANCE period. Upon shipment, Exporter(Seller) generally prepares all the required documents which are required as per the trade commercial contract which includes Invoice,Packing List,Bill of Lading (BL) or Airway Bill, Bill of Exchange and other documents if any called for and will be routed through Exporters bank to the Importer(Buyer) which allows Importer to retire the documents basis acceptance and release the goods.Export Bill Discounting is generally a post-shipment facility and is not backed by LC’s. This limit generally forms a part of CAT 1 limits and it is needless to mention it as a product with recourse.For exporters who got Bill Discounting facility, all the required documents as a part of the trade contract will be submitted to the bank counters and the bank typically discounts 80%-90% of invoice value and credits your account to ease the working capital. Upon receipt of this payment from the Importer, the outstanding will be knocked off along with interest portion and the remaining bill value will be credited back to the Exporter’s account.Bill Negotiation:Bill Negotiation is a term used when the documents of the exporters are negotiated at the counters of banks and a facility is drawn out of it, post shipment. This particular product is availed for shipments done under the documentary credit.As an exporter, one needs to exercise caution while preparing documents under the documentary credit, to ensure it's a clean bill and not a discrepant document. Clean Bill Negotiation is where the client limits are not used and discounted under bank lines depending on the availability of limits/lines between the Exporters and Importers bank.Clean Bills are negotiated and credited to exporters account upon receiving acceptance from the bank who issued the LC.This forms a part of CAT 2 limits when it is offered to exporters without recourse and limits drawn on bank lines. This is an off-balance sheet product.From a banker’s perspective, Bill Negotiation is a low-risk trade product as it is backed by LC compared to Bill Discounting.If you need any further clarification, please write to us Bhaskar@savedesk.coTo Read about Foreign letter of credit discounting click here
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Exporter's Understanding on Bill Discounting and Bill Negotiation

Exporter's Understanding on Bill Discounting and Bill Negotiation

Saravana Bhaskar
Most of the times, we would hear our working capital bankers discussing Bill Discounting or Bill Negotiation on our export bills, although, the outcome of both the products are one and the same. It en...
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Understanding Options & difference between Forwards & Options

In this article, we are going to understand currency hedging product known as Currency Options.Exporters / Importers get into financial contract hedging to protect their exchange losses or adverse movement of currency which may arise due to commercial contract payment terms. Hedging helps us to give a visibility of exchange rates on future dates thus, cash flows can be managed well.Currency Options or FX Options are commonly used terms in banking & finance. It is a derivative product which gives the authority but not the obligation to deliver the currency at the agreed exchange rate on a specified date i.e., the Maturity date.This article will help us understand the vanilla option contract i.e, Call option & Put Option.Call Option:Call Option gives the right but not an obligation to buy the foreign exchange at an agreed exchange rate on the maturity date.Put Option:Put Options gives the right but not an obligation to see the foreign exchange at an agreed exchange rate on the maturity date.Factors Influencing Pricing of Option Contract:1.Strike PriceThe Strike price is basically the exchange rate at which the derivative can be exercised on the maturity date. Strike price forms an integral part of pricing an Option. Strike Price is nothing but, agreed exchange rate on maturity. This strike price is compared relative to the present value of exchange between the currency pair of the underlying options contract to determine whether it's “In the money” or “Out of Money”.This is one of the major factors which could influence your options contract.Spot Rate:Spot is the interbank rate available at the time of entering into the options contract.Volatility:This is basically the historical and the anticipated currency movement between the currency pair being hedged for the period of hedge.Premiums:Premium is the cost that incurred to avail options contract from your Authorized Dealer. Premium becomes an expense in your balance sheet immediately upon availing the options contract.Bank Margins:Bank Margins are generally inbuilt in premiums when it's offered to you by the authorized dealer.Difference between Forward Contract & Options:1.No direct cost is involved in availing a forward contract however, there is a premium cost in options contract.2.Forward contract is an obligation however Options is a right.In case you have any clarification relating to hedging,please write to us advisor@savedesk.co
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Understanding Options & difference between Forwards & Options

Understanding Options & difference between Forwards & Options

Piuesh Daga
In this article, we are going to understand currency hedging product known as Currency Options.Exporters / Importers get into financial contract hedging to protect their exchange losses or adverse mov...
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Advantages of Taking Buyer’s Credit Quotes from a Consultant

Buyer’s credit is a low-cost import-financing product available in the market for a while. It allows the importer more time to make the payment at a very low additional interest cost, while the exporter immediately receives the payment, making it an ideal product for the importers.The importer can either go to his bank for availing Buyer’s Credit or to a consultant who deals with arranging Buyer’s Credit quotes. A bank in India typically might have 5-10 tie-ups with their own subsidiaries outside India or associate FI’s who would provide quotes. However, a consultant of repute might have more than 50 tie-ups across the globe and various time zones helping them to provide much better or cheaper quote vis-a-vis a bank’s quote. Typical costs associated with Buyer’s credit are as below:Interest Cost (Charged by the overseas bank funding the transaction) + LOU Charges (Charged by the importer’s bank for letter of undertaking issuance) + Arrangement Fee (Charged by the the Consultant for arranging the quote. Few banks also charge this on top of LOU issuance) + Withholding Tax (Only in cases where it is applicable).Availing the Buyer’s Credit quotes from the consultant in most cases can result in interest reduction of 50 to 100 bps or more, making it more affordable than a quote from the bank. Considering the rest of the process, until funding remains the same, it makes more rational for an importer to evaluate the overall cost before proceeding with the transaction either with the bank or the consultant.Few other Benefits:A reputed consultant can also help with following up on timely funding, obviating delays in exporter receiving the payment.Consultant can guide the customer from end to end, making the whole process convenient especially for the importers who are availing such products for the first time.Right consultants can also advise the importer on various hedging solutions, limiting the risks associated with adverse movement of foreign exchange.Can help the importer understand the pulse of the market on buyer’s credit and associated costs making it easier for them to avail the same in future.
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Advantages of Taking Buyer’s Credit Quotes from a Consultant

Advantages of Taking Buyer’s Credit Quotes from a Consultant

Kranthi Tilak Reddy
Buyer’s credit is a low-cost import-financing product available in the market for a while. It allows the importer more time to make the payment at a very low additional interest cost, while the expo...
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Difference Between Letter of Credit and Bank Guarantee

As the name indicates Letter of Credit (L/C) is a financial instrument, which is issued by banker basis Buyers creditworthiness. Usually, the terms “L/C” and “Bank Guarantees” are used interchangeably by finance person as they share certain similarities. However, there is a difference in how banks look at these products in terms of liability on their book. Definition of Bank GuaranteeAs the name indicates, a guarantee given by a bank on behalf of his customer (account holder) to the beneficiary, for assurance of payment in the event of default by its applicant is called bank guarantee. Bank guarantee is the usual practice in public tenders/govt related works in domestic markets. Bankers charge commission up to 1.5% per annum on the issuance of bank guarantees.  There are two types of bank guarantees:Financial GuaranteePerformance GuaranteeDefinition of Letter of CreditA letter of credit is a financial instrument, which is issued by a buyer to the seller, confirming a payment. A typical LC will have certain clause/terms which have to be met by both buyer and seller for the successful execution of the transaction. Basically, for Buyers/Importers, it will clearly mention terms of payment by the seller.For the seller, it will contain terms like type/quantity & condition of goods & documentary evidence along with relevant shipment bills etc. Once all the terms and condition are met, the bank will transfer funds . This Product is availed by Exporter/Importer.Types of Letter of Credit Sight L/CUsance L/CRevolving L/CIrrevocable L/CStandby L/CConfirmed L/CRed Clause L/CTypical cost of LC can run up to 2% of transaction cost which can be collected under various heads like-LC Opening Charges LC retirement Charges Forex MarginsKey Differences Between Letter of Credit and Bank GuaranteeGuarantee is an instrument given by the applicant’s bank to the beneficiary, confirming payment in the event of default, whereas the Letter of Credit is a payment assurance given by the applicant’s bank, subject to certain terms and condition.Under Bank Guarantee, a bank takes responsibility for payment when the client fails to honor commitment. In Letter of credit, Primary Liability lies with the bank to collect payment from the seller.The number of parties involved in Bank Guarantees is restricted to the applicant, beneficiary and banker, whereas in case of LC, it can be more than three, i.e applicant, Applicant/issuing bank, beneficiary, advising bank, negotiating bank and confirming bank.Bank Guarantee is used for domestic transactions, whereas the letter of credit is used for import/export transactions.Under LC, payment is honoured under successful acceptance of terms and conditions. Under bank guarantee, payment is made under default of certain terms and conditions.More about Bank Guarantee & Letter of credit can be read on-https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=6523
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Difference Between Letter of Credit and Bank Guarantee

Difference Between Letter of Credit and Bank Guarantee

Saurabh Jain
As the name indicates Letter of Credit (L/C) is a financial instrument, which is issued by banker basis Buyers creditworthiness. Usually, the terms “L/C” and “Bank Guarantees” are used interch...
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Forward Contract from Importers and Exporters Perspective

In simple terms, a Forward Contract is an over-the-counter instrument that sets the price of an instrument today for delivery on a future date. This is done in exchange for another financial instrument or an asset as agreed at the time of Forward Contract execution.Forward Contract generally refers to currency (Foreign Exchange)market. Yet, this applies to other asset classes too such as Equity market, Commodities.In this session, we are detailing on currency Forward Contract and operational understanding about the same from both Exporters’ and Importers’ point of view.Currency Forward:It’s a special type of contract in which agreements are made between two parties  to exchange two different currencies at a future date, wherein the price of exchange is agreed today. Currency Forward as a hedging tool helps the buyer or seller in protecting the exchange fluctuations, thereby it helps them to forecast their cost well in advance.Currency Forwards are plain vanilla derivative instruments.Delivery Rate = (Current Spot + Premiums for period of contract ) ± Agreed bank exchange marginsDelivery Rate:Delivery rate is nothing but a rate agreed by both the parties at the time of entering into Forward Contract which will be delivered at any cost on maturity i.e., by end of Forward Contract date.Currency Spot:Currency Spot refers to rate either on Bid/Ask side of interbank rates applicable at that moment. SPOT generally gets delivered on T+2 days on the exchange of currency.Premiums:Premiums refer to interbank premium rates either on Bid/Ask side. Premiums are generally driven by interest rate differences between the currencies of exchange during the Forward Contract.Bank Exchange Margins:Except for Authorized dealers, none can deal in currency forwards. Generally, bank facilitates these trades where the client agrees to buy or sell foreign currency at future date with a bank. Bank executes these contracts by setting up LER(Loan Equivalent Risk) limits for the clients who need Currency Forwards.Typically, LER for major currency with INR as pair is Max of 20% for a 1-year tenor. Based on the relationship, bank charges margins for facilitation of this product ranging from 0.01% to 3%.Costs Involved:Typically Forwards are done on the basis of margin money, inform of FD or Limits and are assigned based on past performance of your import/export business during the last financial year. There is no specific cost as such, unlike Options where the premiums are paid upfront. However, there could be limit setup fee and exchange margins for facilitation of this product by authorized dealersFrom Importers perspective:Importers in India use this product to control the outflow of INR against the currency of purchase in the future date. This will enable to manage their profit margins respective to the transaction.Importers agree to buy Foreign Exchange i.e., currencies other than INR for delivery on future date depending on the trade. Foreign currency will be bought at a prescribed price by selling equivalent value of INR on maturity.In this case, it is assumed that the importer wants to get into Currency Forward contract basis, for a trade of 3 Months. His contract rate should be as followsInterbank Spot : 65.41Premiums for 3 Months:70.50 PBank Margins : As agreed mutually between bank and client, let’s take 5p for a dollar in this case.Client rate = 65.41 + 0.7050 + 0.05 i.e, 66.165 is delivery rate for this importer by end of 3 Months.Importers pay the premium, which increases the cost of the product. Hence, pricing of the product needs to be done accordingly.From Exporters Perspective:Again Exporters use this product to avoid any fluctuations in currency exchange. Since most of currency pairs are on premiums, Exporters are at the benefits in getting into Currency Forwards.Exporters get the premium paid for the period of Currency Forward contract over and above the SPOT interbank.Exporters in India agree to sell foreign currency and buy INR against an agreed rate, as per Currency Forward contract.Let's have a look at the same illustration above quoted from exporters perspective:-Interbank Spot  : 65.41Premiums for 3 Months: 68.50 PBank Margins : As agreed mutually between bank and client, let’s take 5p for a dollar in this case.Client rate = 65.41 + 0.6850 - 0.05 i.e, 66.135 is delivery rate for this Exporter by end of 3 Months.This is all about Currency Forwards till you enter into a contract with your authorized dealers. Banks set up your limits for such Currency Forwards based on your past performance(PP Limit) or on the basis of the current underlying exposure on foreign currency.Want to understand more on currency forwards? Please write to advisor@savedesk.in
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Forward Contract from Importers and Exporters Perspective

Forward Contract from Importers and Exporters Perspective

Saravana Bhaskar
In simple terms, a Forward Contract is an over-the-counter instrument that sets the price of an instrument today for delivery on a future date. This is done in exchange for another financial instrumen...
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Processing and Settlement of Export Payments through Online Payment Gateway Service Providers (OPGSP’s)

Keeping in mind the ever-growing e-commerce business in India, RBI has decided to permit AD category-1 banks to facilitate export payments by entering into an arrangement with OPGSP’s. The latest guidelines for the same are given below- AD Category-1 banks should diligently report each such arrangement to Foreign Exchange Department, RBI. (i) Banks have to carry out due diligence on the OPGSP that they are making an arrangement with.(ii) Maintain separate Export and Import Collection accounts in India for each OPGSP.(iii) They have to make sure the transactions are genuine and ensure that the purpose codes reported to the RBI are in line with the actual transaction.(iv) Any pertinent information relating to such transactions should be submitted to RBI as and when advised. (v) AD Category-1 banks have to do the reconciliation and conduct an audit of collection accounts on a quarterly basis.Foreign companies, operating as OPGSP should open a liaison office in India after an approval from RBI before entering into such arrangement with any AD category-I bank. OPGSPs have to strictly adhere to the below-mentioned conditions.(i) Adherence to the Information Technology Act, 2000 and all other applicable laws/regulations for such transactions.(ii) There has to be an infallible system for resolution of disputes and complaints related to these transactions. Any issues related to payments should be resolved by the concerned OPGSP.(iii) There has to be reserve fund in line with their refund on returns policy.(iv) Sellers should be signed up after conducting necessary due diligence.Domestic companies, which are intermediaries for electronic payment transactions and want to take up cross-border transactions, should have separate accounts for both domestic and cross border transactions.Export transactions(i) This facility is made available only for export of goods and services (as permitted under the current Foreign Trade Policy) and the transaction cannot exceed USD 10,000 per transaction.(ii) AD Category-I banks offering such facilities should open a NOSTRO collection account for receipt of the export-related payments enabled through such setup. Exporters availing this facility should mandatorily open notional accounts with the OPGSP. Funds cannot be retained in notional accounts and should be transferred to NOSTRO collection accounts of the banks.(iii) Any balance held in the NOSTRO collection account should be repatriated to Export Collection account in India and transferred within 7 days to the respective exporter’s account with the bank, post receipt of confirmation from the importer.   Below debits are permitted to the OPGSP Export Collection account maintained in India.Any payments to the respective Indian exporter’s account.Commission at rates or frequencies as per the contract to the current account of the OPGSP andCharge the importer in cases where the Indian exporter has failed to execute as per contract.Export Collection accounts can only receive credits from the NOSTRO collection accounts.Also read Processing and Settlement of Import Payments through Online Payment Gateway Service Providers (OPGSP’s) 
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Processing and Settlement of Export Payments through Online Payment Gateway Service Providers (OPGSP’s)

Processing and Settlement of Export Payments through Online Payment Gateway Service Providers (OPGSP’s)

Kranthi Tilak Reddy
Keeping in mind the ever-growing e-commerce business in India, RBI has decided to permit AD category-1 banks to facilitate export payments by entering into an arrangement with OPGSP’s. The latest gu...
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Forex Hedging for Companies Simplified

Primary objective of forex hedging is to minimize risks associated with forex exposure and its volatility. So, it’s important to have a right hedging strategy that would protect your company from the extreme volatility or movements in a currency pair. There are many companies, which have been drastically affected due to the erosion of their margins purely due to forex movements. There are companies which have lost millions and reported losses solely due to them entering into complex hedging strategies that went horribly wrong for their company.Considering above-mentioned scenarios, it is imperative to have an absolute understanding of various hedging products available in the market and assess both pros and cons before entering into the hedging contract with your bank. Types of hedging products available:Typically MSMEs in India avail two types of hedging products i.e. Forward Contracts and Options.Let's understand how does a forward contract function in layman’s language.Forward Contract: Company ABC P Ltd is into software exports and receives 1 lakh USD a month for the services they provide. Assume USDINR pair as on 1st Oct 2017 is trading at 65, so if they were to enter into a Forward Contract with his bank for next 6 months for 50000 USD/ month i.e. 50% of his exposure, bank would quote rates which might read like belowNov 17 – 65.30Dec 17 -  65.60Jan 18 – 65.80Feb 18 – 66.10Mar 18 -66.40April 18 – 66.60* Above-mentioned rates aren’t actual quotes. Actual quotes vary based on multiple factors and need to be taken from respective banks/advisors at the time of entering into a contract.If ABC P Ltd believes INR would strengthen against USD in the coming months i.e. if they believe that USDINR pair would trade below 65 levels in the coming months, it would make sense to enter into a Forward Contract thereby protecting themselves from the downside of USDINR pair. So, if the company has entered into a contract, they would get rate only as covered in the contract i.e. if USDINR is at say 64 in Jan 18, the company would still get 65.80 as covered in the contract thereby company recording a notional gain of 1.80 Rupee/USD. The flip side to this is, assume the USDINR pair moves against the expectation and INR weakens against USD and USDINR is 66.50 in Jan 18, the company would get 65.80 as per the contract and tends to notionally loose 70 paisa/USD.The company would be asked to deposit a certain amount as a fixed deposit which would be lien marked by the bank to mitigate against adverse volatility.Any company /firm can enter into a Forward Contract with their bank based on the volumes or exposure that they have on a particular currency pair and completing necessary documentation as required by their bank.Options:Options, basically irons out the flip side that we have seen with forwards, that is when the currency tends to move against the expectation company could lose out. So in Options, the company can still go for the IBR(Inter Bank Rate) if the rate is in their favor. In the above example if ABC P Ltd was in an Options contract they could have ignored contract rate i.e. 65.80 and gone with IBR, which is 66.50. However, in Options company has to pay an upfront premium to the bank as the fee, which varies, on multiple factors. It is imperative that company analyzes various costs associated before entering into any hedging instruments.
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Forex Hedging for Companies Simplified

Forex Hedging for Companies Simplified

Kranthi Tilak Reddy
Primary objective of forex hedging is to minimize risks associated with forex exposure and its volatility. So, it’s important to have a right hedging strategy that would protect your company from th...
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How Does Export Factoring Function

Export factoring means funding an exporter through purchase of their invoices and collection of short-term receivables based on goods and services provided to an importer.Export factoring generally is a comprehensive product that’s a combination of working capital financing, credit protection and collection of receivables. A “factor”, is either a bank or financial institution that funds an exporter through purchase of invoices or receivables. Typically a “factor” purchases or funds 80% of the invoice value post entering an agreement with the exporter. This facility is generally provided without recourse. Working model:Post signing of an agreement between the exporter and the factor, an “import factor” is identified, who generally is a correspondent of the “factor” in the exporter’s country. An “import factor” does the necessary checks and establishes the creditworthiness of the importer before approving the facility. An importer places the order for goods under an “open account” terms, then the exporter ships the goods and submits the invoice to the factor locally. Invoice is then transferred to “import factor” that manages collection of receivables and payment.Types of export factoring:Discounting Factoring: The factor pays the exporter in advance against the receivables and then the funds are collected from the importer. The cost of this facility basically depends on the volumes and tenor of discounting.Collection Factoring:In this, the factor pays the exporter after deducting the commission during the maturity time of receivables from importer. This obviates the risk of importer not paying during the maturity.  The commission could range between 2-4 % based on volumes, importers country risk etc. Advantages of factoring:Obviates the risk of non-payment by the importer.Improves the cash flows as it’s an off balance sheet product.Exporter gets an edge in the global market on pricing as he can opt for open account terms with the importer and avoid banking costs associated with D/A, D/P and Letter of credit.Collection of receivables is handled by the Factor.It’s cheaper than long term financing through banks or any other unsecured domestic loans.Disadvantages of factoring:It is relatively expensive than export credit insuranceThis product is generally not available for receivables that have usance period of more than 180 days.It is more suitable to an established exporter than export company, which is new, as factors generally prefer significant yearly export volumes.
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How Does Export Factoring Function

How Does Export Factoring Function

Kranthi Tilak Reddy
Export factoring means funding an exporter through purchase of their invoices and collection of short-term receivables based on goods and services provided to an importer.Export factoring generally is...
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Everything you need to know about Business Loan

Loans imparted to meet Short Term working capital gap arrangement are referred to as Business Loans or Business Installment Loans. Such loans can be availed by business houses from multiple loan providers such as Banks, NBFC, P2P lenders etc.While there are myriad options available in the market, businesses should be cautious to resort to such loans arrangements as they are the most expensive forms of financing available in market.Typical Business Loan cost includes the following- Loan Interest is charged between 16-18% Processing Fees can be charged upto 2% Preclosure Charges – Can run up to 4%.Before availing such loans from Financial Institutes, businesses should keep following 4 importants points- 1. Cost of Loan :- The first and foremost thing a business owner should be asking himself is - “Is this the right kind of product at right cost?” Since its non-collateralised product is available in the market, rate of interest is high as mentioned before and tends to eat away bottomline nos.2. No of Loans :- While applying for loans, businesses tend to resort to easiest and quickest ways of applying  loans with multiple lenders, which tends to affect credit score of the company. Bankers relate these Cibil checks with credit worthiness of company. More no. of Cibil checks performed generally indicates that customer loan has been turned down by those many no of Banks/NBFC  & attract hawkish eye from current lender’s credit team.Best approach is to take in principle letter from bankers/NBFC to confirm their intent on funding & apply strategically among shortlisted 2-3 lenders, as per ROI, Preclosure charges , Processing fees etc.3. Prepayment  Penalties:- During the testing times of businesses, many business tend to succumb, to accept all the terms & condition mentioned in the sanction letter.Prepayment penalty is a fee that lender charges if you settle your loan before the loan tenure/predefined tenure. Basically this penalty is imposed to discourage lender from early closure of loans, as it lead to loss of interest earning opportunity for lenders .The point here is that difficult times may last only for a few quarters, but your loan is going to stay with you for good 3-5 years of time. Always ensure that Prepayment penalty clause is discussed and negotiated before acceptance of offer letter.4. Alternate options of Funding:-There are various alternative loan options available in market which are economical and better options than conventional business loans.You should always ask your lender for various alternatives available for your current business needs. Few such alternate options can be- Equipment Finance Loan - In this type of funding, equipment/Machinery of company gets hypothecated to lender.CGTMSE - Government of India has come up with a credit guarantee fund scheme(CGTMSE) for micro and small enterprises in manufacturing sector, which extends up to 2 cr of loan by lending institutions against guarantee. This facility is available at cheapest cost of funds linked to base rate of lending institution.Line of credit Facility - Few banks/NBFC’s come up with tailored solutions to meet your short-term working capital requirement in the form of Credit facility. This facility gives you the flexibility to use funds as per your banking needs and you will be charged only on borrowing .With plethora of lenders available in the market, identifying a right lender, with right product mix at cheapest cost becomes of utmost importance for businesses. Any borrower should evaluate the above points before getting into any lending commitments.
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Everything you need to know about Business Loan

Everything you need to know about Business Loan

Saurabh Jain
Loans imparted to meet Short Term working capital gap arrangement are referred to as Business Loans or Business Installment Loans. Such loans can be availed by business houses from multiple loan provi...
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