What Is a Working Capital Loan for Exporters?
As an exporter, you face many challenges. You start by competing in the international market with more stringent quality standards. You must also meet timelines while dealing with external factors and stay competitive regarding pricing. Additionally, payments could take time to be realized in your account.
Most exporters seek financing options, such as bill discounting, to ensure they can keep operations running and meet their commitments. While some schemes and finance options are available for exporters for longer-term finance, they also need working capital support. At LeRemitt, we support exporters with our cross-border platform and helpful information to help you in your business.
What is a working capital loan?
Compared to a capital loan, which is used to purchase business assets and has long repayment terms, working loans are shorter-term and used to keep the business working. A working capital loan for export businesses is a financing option to help exporters run their business operations. It bridges the gap that occurs between the production and payment cycle.
Why are working capital loans essential for exporters?
Given production time, shipping time, customs clearance, and the realization of payments into their bank accounts, exporters face a longer cycle to get payments via an df. Considering these factors, you will realize that exporters often face issues managing short-term fund requirements.
Often, exporters seek a working capital loan to purchase raw materials for their next consignment, cover production costs, pay wages to their workers, or meet other short- term requirements.
What are the general types of working capital loans?
Pre-shipment working capital loan
This type of working capital loan is required when the exporter needs support to complete the order and send it to the buyer. The exporter may approach the financial institution or bank with the order confirmation documents and seek short-term support.
Post-shipment working capital loan
In this case, the exporter has sent the consignment but has not received payment from the buyer. The loan will cover any interim expenses or can be used to keep operations running for the next order. The exporter may seek this kind of loan with the help of a bill from the buyer, who has promised to pay.
What are the different forms of working capital loans?
1. Cash credit limit: The exporter will get a credit line from the bank or financial institution, allowing them to withdraw funds as required up to the limit set.
2. Bill discounting: The exporter can collect the bills due from the buyer and have them discounted by the bank or financial institution to gain immediate access to funds.
3. Packing credit: This is a short-term loan that the exporter is given against an order to help them pack and send the order. It needs to be repaid from the shipment proceeds.
4. Export factoring: Financial institutions will factor in the exporter’s receivables due at some time and provide funds for immediate use against them. The collection risk is then passed on to the bank or financial institution.
How can an exporter become eligible for a working capital loan?
Like any other loan, the financial institution or bank will consider many factors before granting a loan to an exporter. First, they will look at the exporter's track record with financial institutions and repayment. Many times, this may not be possible. In that case, they will check if the exporter has a valid export order from a reputed buyer. If the order is backed by a letter of credit, it will add more weight to the loan request.
Sometimes, the exporter will provide some form of collateral to get the loan or even seek a reputed guarantor to get the loan going. The loan terms will depend on many factors, including the lender's policies.
The Government of India has many schemes that support exporters in establishing a running business. Moreover, if the business falls in the medium- or small-scale industries category, you can avail yourself of further facilities. Each financial institution or bank will tailor its loan and interest charges depending on many factors.
These will be based on the support they receive for such loans, the borrower's credibility, the terms of the export order, and several other factors. In most cases, the interest rates and terms will depend on your business's credibility and track record.
As you can see, working capital loans are crucial in running an exporter’s business.
Want to avail trade factoring? Get in touch with our team at LeRemitt.
