Finance for MSME Exporters: Understanding Guidelines and Processes

[YAGAY andSUN]

Micro, Small, and Medium Enterprises (MSMEs) form the backbone of many economies, contributing significantly to employment, innovation, and economic growth. In India, MSMEs play a crucial role in the export sector, as they account for a substantial portion of the country’s exports, particularly in sectors like textiles, handicrafts, machinery, food products, and chemicals. However, despite their potential, many MSME exporters face challenges in accessing finance, which is critical for scaling their businesses and penetrating international markets.

This guide outlines the key financing options, guidelines, and processes available to MSME exporters to help them overcome financial barriers and expand their global reach.

1. Importance of Financing for MSME Exporters

Exporting requires significant financial resources for several activities, including:

• Procurement of raw materials
• Production and manufacturing
• Meeting regulatory requirements for exports
• Transportation, warehousing, and logistics
• Marketing and market expansion
• Customs and duties associated with international trade

Proper financing ensures that MSME exporters can manage their cash flow efficiently and meet the demands of foreign buyers while sustaining growth.

2. Types of Financing Available for MSME Exporters

Several financing options cater to the unique needs of MSME exporters, both domestically and internationally:

a. Export Credit and Trade Finance

• Pre-shipment Finance: This financing option helps MSMEs fund the production or procurement of goods intended for export. It covers expenses like the purchase of raw materials, labor costs, packaging, and shipping. Banks typically offer packing credit or pre-shipment credit to exporters at competitive rates.
• Post-shipment Finance: After goods have been shipped, MSMEs need funds to bridge the gap between shipment and payment receipt. Post-shipment financing includes options like:
  • Export Bills Discounting: MSMEs can discount their export bills (i.e., receivables) with a bank to get immediate cash flow.
  • Export Factoring: Factoring services allow MSMEs to sell their receivables to a third-party (factor) at a discount, which enables them to receive instant cash rather than waiting for the payment from foreign buyers.
  • Export Invoice Financing: This involves borrowing money against outstanding invoices, providing MSMEs with working capital to continue operations while waiting for customer payments.

b. Export Credit Insurance

• Export Credit Guarantee Corporation of India (ECGC) provides export credit insurance, which protects MSMEs against payment defaults, political risks, or non-payment by foreign buyers. It also helps exporters access better financing options from banks as it reduces the risks involved in global trade.

c. Working Capital Financing

MSMEs involved in exports need regular working capital to maintain day-to-day operations. There are various short-term working capital financing options, including:

• Cash Credit (CC) and Overdraft (OD): These are revolving credit facilities that can be used to meet short-term capital requirements.
• Bill Discounting: MSMEs can discount their trade bills (bills of exchange) to raise short-term funds.
• Letter of Credit (LC): LCs are a common method of payment in international trade and can be used as a financing tool. Exporters can present their LCs to the bank for financing.

d. Government Schemes and Export Incentives

The Indian government offers several export-oriented schemes and incentives to promote MSME exports, such as:

• Merchandise Exports from India Scheme (MEIS): Provides incentives for export of specified goods to specific markets, allowing MSMEs to benefit from duty credits.
• Service Exports from India Scheme (SEIS): Similar to MEIS, this scheme offers incentives to MSMEs in the service sector for their export-related activities.
• Interest Equalization Scheme: Provides a subsidy on interest rates for exporters, including MSMEs, to make credit more affordable.
• Export Promotion Capital Goods Scheme (EPCG): Allows MSMEs to import capital goods for export production at zero customs duty, boosting manufacturing capacity for exports.

e. Microfinance and Loans for MSMEs

• Mudra Loans: The Pradhan Mantri Mudra Yojana (PMMY) provides financial assistance to micro and small enterprises in the form of Mudra loans. The scheme has three categories – Shishu, Kishore, and Tarun – to meet the varying financial needs of MSMEs at different stages of their growth.
• National Small Industries Corporation (NSIC): NSIC offers financial assistance in the form of working capital, machinery finance, and other credit facilities to MSME exporters. They also provide vendor development programs for MSMEs, helping them access new markets.

3. Process for MSME Exporters to Access Financing

The process to secure financing for MSME exporters generally involves the following steps:

a. Business and Credit Assessment

• Documentation: MSME exporters must provide necessary documentation such as business plans, export contracts, financial statements, tax returns, and credit history to assess their financial health.
• Creditworthiness: Lenders and financial institutions will assess the exporter’s creditworthiness by reviewing their payment history, financial stability, and the ability to repay the loan. A strong business plan and solid financial records can improve the chances of securing finance.

b. Identification of Suitable Financing Options

• Pre-shipment and Post-shipment Finance: Depending on the timing and nature of the export, MSMEs must select the appropriate financing option, such as packing credit, bill discounting, or working capital loans.
• Government Schemes: MSME exporters should explore government schemes such as MEIS or EPCG, which may require special applications or adherence to specific eligibility criteria.

c. Approaching Banks and Financial Institutions

• Banks and Export Financing Institutions: MSME exporters should approach banks or financial institutions that offer trade finance services. Some banks have specialized export financing departments that can guide MSMEs through the application process.
• Application Process: The application will involve submitting the required documentation, including the proforma invoice, export contract, shipping documents, and customs clearance records.

d. Approval and Disbursement of Funds

• After evaluating the application, the bank or financial institution will approve the financing. In the case of loans, MSMEs will receive the funds either as a lump sum or in instalments, depending on the agreed-upon terms.
• Insurance and Risk Mitigation: If the exporter is using export credit insurance, the relevant insurance coverage will be activated, helping mitigate risks associated with international trade.

e. Repayment

• Repayment Terms: Repayment terms for MSME export financing can vary based on the type of finance availed. Pre-shipment finance generally has shorter repayment cycles, while post-shipment finance may allow longer repayment periods. It is crucial to manage cash flow effectively to meet repayment obligations.
• Interest Rates: The interest rate for export credit is typically lower compared to regular business loans due to the export nature of the business and government incentives.

4. Key Challenges Faced by MSME Exporters in Financing

• Access to Affordable Credit: MSMEs often face difficulties in accessing credit at competitive interest rates. Many small businesses lack collateral, which makes it difficult to secure financing.
• Documentation and Bureaucracy: The process of applying for finance can be complex, with extensive documentation and procedural delays.
• Currency Risks: MSMEs engaging in international trade are often exposed to currency fluctuations, which can increase the cost of financing. Export credit insurance helps mitigate this risk, but it is still an area of concern.
• Market Knowledge: MSMEs often struggle to understand and navigate international markets, regulations, and trade policies, which can lead to difficulties in applying for financing under schemes like EPCG or RODTEP, AA, Duty Drawback etc.

5. Best Practices for MSME Exporters Seeking Financing

1. Maintain Clear Financial Records: Ensure that financial statements and records are accurate and up-to-date, as this is a critical factor for securing financing.
2. Develop Strong Business Relationships with Financial Institutions: Establish good relationships with banks and export finance institutions to improve your chances of getting financing when needed.
3. Understand Government Schemes: Be aware of the various government schemes and incentives available for exporters. Take advantage of these opportunities to reduce costs and improve cash flow.
4. Manage Cash Flow Effectively: Be proactive in managing cash flow by tracking payments from international customers and managing receivables efficiently.

Conclusion

Access to finance is a crucial enabler for the success of MSME exporters in India and worldwide. While various financing options and government schemes exist to support MSMEs in their export endeavours, understanding the available resources, processes, and the challenges associated with securing financing is vital. By effectively utilizing trade finance, export credit insurance, government schemes, and good financial management practices, MSME exporters can scale their businesses and compete in the global market with confidence.