In international trade, organizations can find it challenging to navigate through various intermediaries and get their goods shipped to the right place at the right time and, most importantly, with all the necessary documentation. Moreover, importing and exporting require a fair share of funding which most companies may not always have. That's where export credit agencies play a key role. Export credit agencies first came into being as governments wanted to support local companies in increasing their exports. They offered the necessary support to minimize the risk to both parties in international trade and reduce the barriers to entry for smaller domestic businesses.
What Is An Export Credit Agency (ECA)?
An export credit agency is an organization that provides trade financing solutions to domestic companies to facilitate international exports. ECA can help domestic companies by offering financing solutions, insurance and other services to help eliminate the risk of exporting to other countries.
ECAs typically provide credit and credit insurance services and sometimes a combination of both. An ECA is critical because it supports domestic companies by expanding the market for their products overseas. These agencies can be either government or quasi-government agencies, or even commercial banking and financial institutions. The services offered by an ECA are very similar to regular banking or insurance services.
When Can Export Credit be Availed
Generally, any exporter is qualified to apply for financial support from an export credit agency. ECA assists domestic companies with financing solutions, insurance, and other services that can help eliminate the risk of exporting to other countries. Hence. Any company can request export credit to mediate risk factors as long as the necessary paperwork is in order.
Types of export credit
An export credit agency provides various financial services to its clients.
Pre- Shipment Finance An ECA gives this kind of financing to the exporters to assist them with purchasing raw materials and turning these into finished items.
Post Shipment Finance Companies take post-shipment finance to maintain their working capital after they have shipped their products. Since the importer will take around 3-6 months to pay against the invoice, the exporters turn to post-shipment finance.
Bill Discounting and Invoice Factoring As mentioned above, since the importer might take some time to pay for the imported products, the exporters can choose bill discounting or invoice factoring solutions for faster liquidation. Here a third party is involved with whom the invoice is discounted.
What Services Do ECAs Offer?
The primary purpose of ECA is to boost exports and facilitate trading by financing the same. This will further lead to achieving its other overarching objectives, which includes expanding the economy and creating employment. To achieve these, there are various services that an ECA provides:
- An ECA provides financing to foreign buyers when the domestic lenders are unwilling to finance exports even with reduced risk. It helps to finance exporters of all sizes selling all kinds of products.
- Their most crucial function is to protect the parties from threats such as cancellation of import/ export licenses, political violence, etc. by leveraging their economic and political network
- ECAs help exporters by reducing their risks in extending credits to foreign buyers.
- It encourages the national insurance industry to participate in the coverage of risks and non-payment of export credits.
- It helps national firms invest abroad to increase their foreign exchange reserves.
How are ECAs different from Banks?
ECAs can be government bodies, private lenders, or semi-private lenders. The main difference between banks and ECAs is the organization's objective. While ECAs main objective is to assist in international trading, banks have various departments that ensure a smooth flow of cash throughout the region. Banks may provide businesses with multiple alternatives to help them finance their trading, like bank guarantees, letters of credit, inventory loans, or SME business loans. However, banks are not responsible for ensuring that the trading is taking place smoothly, as the ECAs are, as discussed above.
What are the details listed in an ECA contract?
Since ECAs provide different services, each service contract would be different. But few things stay constant throughout ECA contracts; these include-
- Date: The Date at which the contract is being made
- Parties involved: Each contract will mention the parties involved, i.e., the number of trading parties, their banks, etc.
- Details of the purchase: This involves a detailed description of the products, the type, and quantity, among other details.
- Role of ECA in the transaction: This talks in detail about how the ECA is involved in the business transaction, the type of financing availed, the minute details of the date when the loans/ insurance have been requested to the date it has been availed. It will also mention if the ECA has been involved in more aspects.
- Events of Default: This will include “what if” situations such as events of payment defaults, or impaired agents and potential courses of action.
- Prepayment and cancellation: These include prepayment terms, if any, along with the cancellation terms.
Why should companies opt for ECA’s services?
ECAs provide loans, guarantees, and insurance to help eliminate uncertainty. Companies that choose to associate themselves with ECA can gain several benefits, including:
1.Expansion into new markets With ECAs, one's business is protected even if the foreign customer defaults in payment. Hence one can expand into new horizons confidently.
2.Boost in Sales International businesses always have the scope for increasing sales with current customers if given an extension in credit terms. ECA acts as a safety net for an overseas company’s receivables, enabling it to take advantage of opportunities and boost sales.
3.Transfer the Burden of Credit Management As an exporter, one already has a lot on the plate, while one thing which is lacking is time. ECA helps reduce the burden of credit risk management and lets exporters concentrate on exporting. The management of receivables, from buyer evaluation to protection to collection, can be enhanced by working with the ECA and taking advantage of its credit management expertise.
What are EPCG schemes
EPCG, or Export Promotion Capital Goods scheme, is implemented to facilitate the import of capital goods. These goods can be used to produce better goods or services, which will enhance India's competitiveness in the global market when it comes to manufacturing. This scheme allows importers to import capital goods for pre-production, production, and post-production at zero customs duty. They are also exempted from IGST. Import of second-hand capital goods is not eligible under this scheme. Exporters who want to export in considerable amounts to India can take advantage of this scheme as it provides incentives along with other financial assistance to exporters.
What Role Does The ECGC Have to Play in India?
ECGC Ltd., a wholly-owned subsidiary of the Government of India formerly known as the Export Credit Guarantee Corporation of India Ltd., was founded in 1957 to foster national exports by offering credit risk insurance and associated services. To meet the needs of Indian exporters, it has developed various export credit risk insurance solutions over the years. In essence, ECGC is an organization that promotes exports and works to increase the competitiveness of Indian exports by giving them access to credit insurance.
To fulfill the needs of commercial banks offering export credit, the Corporation has created several export financing schemes. The insurance coverage allows the banks to provide exporters with timely and sufficient export credit facilities.
To protect Indian exporters from the risk of not realizing export revenues owing to commercial or political hazards, ECGC offers a variety of insurance and financing services.
It also provides an export factoring facility for MSMEs which includes services like working capital financing, credit risk protection, sales ledger maintenance, and collection of receivables from a buyer in a foreign country.
ECAs are crucial for global trade. They reduce the risk associated with private lending by providing export credit guarantees. ECAs are consequently emerging as critical participants in exports and international project financing and are assisting in bridging the funding gap created by private sector lenders' incapacity or unwillingness to offer credit.
