Question

A capital good exporter in INDIA received an export order from USA for value of USD 800,000 for supply of handicrafts. In terms of the market practice, buyer wants 90 days credit.

Questions: Analyze various options raising finance from any of the financial institutions. Find Best Option

Option 1 : Request the buyer to open a confirmed letter of credit. Raise finance against the LC bills (LC bills discounting) in the domestic market either in INR or USD whichever is favorable.

Discounting Charges , INR = 8.75%, USD=4.45%. Confirmation charges on seller = 1.50%

Option 2 : There will be no letter of credit. You have only the confirmed order from the buyer. Cover the risk with any credit risk insurance agency like ECGC. Avail finance from the local bank either in USD or INR as per your requirement.

Discounting Charges , INR = 10.75%, USD=5.45%.Credit Risk Insurance Cost = 1.50%

Option 3: International Factoring agency is quoting 8.00% discounting charges without recourse. Factoring agency’s funding will be in USD denominated. Currency exposure will be taken over by the factoring agency.

USD/INR –SPOT 68.80 , 3 month forwards premium USD/INR 90 paise

Answer 1

1. Out of these three options capital good exporter from India should go for third option i.e. using international factoring agency who will covering risk associated with this transaction by forward contract.
2. By this way 90 days credit will be easily possible, and seller have not to worry about recovery of debt factoring agency will recover amount at maturity from buyer.
3. all documents , processing ,reminders for recovery ,notice etc, will be now handled by agency that will save money ,effort and time of seller.
4. As comparing with another two-options cost associated with this option is comparatively low i.e. discounting charges are 8% which is less as compared other two options.
5. Credit risk will be transferred to factoring agency by paying them discounting charge. and seller can get their amount immediately which he can use in further productive use and don’t need to wait for 90 days.
6. Credit risk and currency exposure can be transferred to international factoring agency.