Question

Question: Recommend the best method of foreign trade financing for an Indian Textile Exporter who is growing steadily year by year. The company exports textiles abroad mainly to US and Europe. As business has increased, the requirement for funds to finance international trade has increased as well.

The options available for the company are:
- Line of credit
- Letter of credit
- Factoring (With recourse or without recourse)
- Forfaiting
- Export Import Bank of India which offers a wide range of services which includes project exports, providing loans, extending letters of credit and guarantees, extending lines of credit, buyer’s credit, marketing advisory services, offering Term Loans, and extends financial support to create export capability in grassroots enterprises.
- Exim Bank has an overseas investment finance program whereby they provide facilities such as loan to Indian companies to invest in overseas ventures, extends letters of credit and guarantees.
​​​​​​​- Foreign credit insurance

Answer 1

Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade.

On default risk, that is, the risk that the debtor refuses to pay up as at when due, factoring offers an option, "factoring without recourse", wherein the factor assumes the payment risk of the debtor.

A letter of credit is the most well known method of payment in international trade. Under an import letter of credit, importer's bank guarantees to the supplier that the bank will pay mentioned amount in the agreement, once supplier or exporter meet the terms and conditions of the letter of credit.

Other than providing financial assistance, the Export and Import Bank of India bank is always looking for ways to promote the foreign trade sector in India.The aim was to improve the quality standards of our imports and exports. It also has a tie-up with the European Bank for Reconstruction and Development. It has agreed to co-finance programs with them in eastern Europe.