Special Economic Zone (SEZ) units operate within an export-unit-based environment, but even if there are strong order volumes, there may not be immediate cash availability. Potential overseas buyers might not pay businesses’ invoices, but businesses still have to invest in the raw materials, production, processing, packaging and logistics.
This results in a shortage of working capital, which may impact production continuity and new order uptake. Export financing can be used to cover various phases of this cycle, from arranging the goods for export to handling receivables after export. Understanding the available financing routes can help SEZ units match funding with their actual operational requirements.
What is Export Financing?
Export financing is a way to receive financing to cover eligible export production and sales costs. It can cover working capital pre-shipment and financing of eligible export receivables post-shipment.
Why SEZ Units Need Export Financing
With respect to an SEZ unit, cash can be pledged in multiple phases of an export transaction. Before the purchase of raw materials and components starts, manufacturing, processing, quality control, packaging, and shipping and logistics will come at an added cost before products are shipped from the factory.
A second shortfall can occur after the shipments have been made if the overseas buyer has received credit time. The exporter has already paid for the actual cost of the order, but may not be paid for the order until later.
It is important that working capital for SEZ units is available to them, so that they can continue to produce their goods without depending purely on their own cash. Financing can assist in matching the timing of business expenditure with when export proceeds are realized.
Export Financing Options for SEZ Units
The type of financing will largely depend on the stage of the export process in which the business finds itself.
- Pre-shipment finance or packing credit can be used to finance eligible costs that occur prior to shipment. According to RBI, a pre-shipment credit involves financing of activities like buying, processing, manufacturing or packing goods prior to export.
- Post-shipment finance is used after the goods are shipped and until the profits from exports are realized. It may involve facilities like discounting, buying or negotiating export bills.
Where applicable, SEZ units can also consider export receivables financing, invoice discounting or factoring.
The financing structure, eligibility requirements, documentation, pricing and repayment terms are based on the lender and the export transaction.
Pre-Shipment Finance for Export Production
Pre-shipment finance is about spending needed to finish an export order prior to shipment. This can be the cost of raw materials or components for SEZ exporters and the expenses of processing, manufacturing and packing. RBI has also given its guidelines for pre-shipment credit facilities in specific export transactions involving SEZ units.
The amount and tenure should correspond to the actual production and shipment cycle. Lenders may assess the export order, buyer details, business performance, projected cash flow, and other relevant information before approving the facility.
This type of SEZ export financing can allow businesses to not have to spend all their liquidity to complete an order, and have more cash available for other business needs.
Post-Shipment Finance Against Export Receivables
After goods are shipped, the financial requirement changes. Now the exporter has a receivable, but he still needs to wait for the foreign buyer’s payment.
This is where post-shipment finance is designed to come into play. Under RBI’s definition, post-shipment credit refers to credit facilities extended by an exporter after shipment or service delivery of export proceeds, on certain conditions.
Export bills or other acceptable receivables will be eligible for financing depending on the facility. This can help to fill the gap between shipping and collection for SEZ businesses that place repeat orders. The extra liquidity can be used for ongoing production, supplier payments, buying inventory and other business demands.
What SEZ Units Need to Apply for Export Finance
The terms and conditions for export financing of SEZ units may differ depending on the lender and the facility. But businesses should be able to supply data that will identify them, finances, export activity, and the basis of their transaction.
Possible needs may be:
- Business and KYC documents
- SEZ-related registration or approval records
- Financial statements and bank statements
- GST and tax-related records, where applicable
- Export orders, contracts, or letters of credit
- Commercial invoices and shipping documents
- Details of overseas buyers and payment terms
- Information about existing borrowing
Additional documents may be required as a result of the applicant, transaction, facility, and credit assessment. Having these records accurate and readily available can aid the financing process.
Choosing the Right Export Financing Structure
The appropriate SEZ financing should correspond to the time the business needs the cash. Pre-shipment finance can be applicable duing the financing to purchase inputs and finalize production. A post-shipment finance option might be better suited if the goods have already been shipped, but payment has not yet been received.
The quantity needed, the expected date for payment, financing cost, length of the term, payment arrangement, current debt obligations of the business and the likelihood that the buyer will pay are all important considerations for businesses.
The goal isn’t just to get the biggest facility that’s available. It is to choose the financing which facilitates the export process without putting an undue burden on repayment.
Keeping SEZ Export Operations Financially Flexible
The best use of export financing is when it is in line with the flow of cash in an enterprise. Pre-shipment finance can be provided for goods in production prior to them leaving the factory, and post-shipment and receivables finance can be provided to provide liquidity after the goods are shipped.
An integrated approach to assessing the export cycle, the terms of buyer payment, financing cost, documentation, and repayment capacity can be helpful for SEZ units to develop a more sustainable working-capital management process.
Read: SEZ Meaning, Working, and Benefits
The Credlix Approach to Export Working Capital
Liquidity needs for businesses that are export-oriented can vary from those for businesses that are more domestic in nature.
Credlix financing is designed to help meet business working capital needs for qualified businesses. For companies with outstanding receivables that are eligible and meet financing terms for export receivables financing, it can help fill the gap from invoice to payment.
This support an exporting customer to have more flexibility in continuing with ongoing operational needs whilst awaiting any eligible receivables to be realized.
Frequently Asked Questions
What is export financing?
Export financing is a means of funding for the purposes of providing financing for eligible export-related working capital needs. It can be used as a financing option for production before shipment or to provide financing against a qualified export receivable after the shipment. The facility, amount, cost and conditions would vary based on the exporter’s transactional and financial profile with the lender.
Can SEZ units get pre-shipment and post-shipment finance?
Eligible SEZ units can access applicable export-credit facilities, subject to the lender’s requirements and the nature of the transaction. Pre-shipment finance may cover the period before the goods are shipped, and post-shipment finance support between the goods being shipped and the proceeds being realised. Specific eligibility and conditions should be confirmed with the financing provider.
What documents are required for export financing?
The requirements differ from one lender to another and from one financing arrangement to another. Business and KYC documents, SEZ-related documents, financial statements, bank statements, export order contracts, invoices, shipping documents, buyer details, and payment terms may be required for export financing applications. Further information may be required as part of the credit assessment for the facility and transaction.
