Once you’ve identified suppliers, products, and markets, and understand export/import procedures, the next hurdle is financing your operations. Cash flow challenges are one of the top reasons SMEs fail in international trade:

• Exporters face delayed payments from buyers

• Importers need upfront capital for purchasing goods and paying duties

A clear understanding of financing options ensures SMEs can execute shipments on time, scale operations, and reduce risks.

Table of Content

1. Understand the Financial Needs of Your IMPEX Business

2. Pre-Shipment Financing Options

3. Post-Shipment Financing Options

4. Import Financing Options

5. Risk Mitigation in Financing

6. Practical Example for SMEs

7. Actionable SME Exercise

8. Common Pitfalls to Avoid

Understand the Financial Needs of Your IMPEX Business

Key Cost Areas for Exports:

1. Production or procurement costs

2. Packaging & labeling for international standards

3. Freight & logistics

4. Customs clearance fees

5. Insurance (cargo & credit)

6. Marketing and branding for export markets

Key Cost Areas for Imports:

1. Supplier payment (product cost + shipping)

2. Customs duty & GST

3. Inland transportation

4. Insurance for goods in transit

5. Storage or warehousing

Actionable Exercise: Create a detailed cost sheet for your first shipment — this will help determine financing needs.

Pre-Shipment Financing Options

1. Packing Credit (PC)

   • Short-term loan from banks to finance raw materials or goods before shipment

   • Typically provided against Letter of Credit (LC) or confirmed export orders

   • Helps SMEs maintain production schedules without cash crunch

2. Supplier Credit / Advance Payment Facility

   • Some banks offer loans to make advance payments to import suppliers

   • Avoids personal fund blockage

3. Government Schemes (Pre-Shipment)

   • MEIS / RoDTEP (now duty remission schemes) can sometimes be financed in advance

   • Banks can discount your eligible export incentives to provide liquidity

Actionable Tip: Approach your authorized dealer bank and discuss pre-shipment financing options before confirming orders.

Post-Shipment Financing Options

1. Buyer’s Credit

   • Short-term credit provided to exporters to cover the gap between shipment and receipt of payment

   • Especially useful for large overseas buyers with delayed payment cycles

2. Invoice Discounting / Factoring

   • Banks or NBFCs pay you a percentage of your invoice immediately, taking the collection risk

   • Ensures smooth cash flow without waiting for buyer payment

3. Export Credit Guarantee Corporation (ECGC) Support

   • ECGC provides insurance for non-payment by international buyers

   • Banks may lend based on ECGC coverage

4. Government Schemes (Post-Shipment)

   • Duty Drawback & RoDTEP refunds can be discounted by banks for immediate liquidity

Actionable Exercise: Calculate time gap between shipment and payment to assess the amount of post-shipment financing required.

Import Financing Options

1. Letter of Credit (LC)

   • Bank guarantees payment to the foreign supplier

   • Protects both importer and supplier

   • Types: Sight LC, Usance LC, Revolving LC

2. Bank Loans / Overdrafts

   • Short-term loans to fund goods purchase and shipping costs

   • Ensure interest rates and repayment timelines are feasible

3. Government Schemes

   • Some schemes provide subsidized finance for importing capital goods or raw materials

4. Supplier Credit

   • Negotiate deferred payment terms with overseas suppliers

   • Often 30–90 days, reducing immediate cash outflow

Risk Mitigation in Financing

1. Currency Risk

   • Hedge using forward contracts or forex products offered by banks

2. Non-Payment Risk

   • Use LC, DA/DP, or ECGC-backed finance

3. Interest Rate Risk

   • Fixed vs floating interest on pre/post-shipment loans

4. Documentation Compliance

   • Bank will only release funds if all documentation is correct (invoice, shipping bill, bill of lading, insurance, LC)

Actionable Tip: Keep a finance checklist to ensure smooth sanctioning of loans and credit facilities.

Practical Example for SMEs

Scenario: SME exporting handmade textiles to Europe

• Order value: ₹20 lakh

• Production cost: ₹12 lakh

• Shipping & insurance: ₹2 lakh

• Customs & documentation: ₹1 lakh

• Payment terms: 60 days after shipment

Financing Solution:

1. Pre-shipment: Packing credit of ₹12 lakh to cover production

2. Post-shipment: Invoice discounting for ₹18 lakh to bridge the 60-day gap

3. Risk mitigation: ECGC coverage to secure payment

Result: SME executes shipment without cash crunch and earns profit on schedule

Actionable SME Exercise

1. List all costs for your first import/export shipment

2. Identify pre-shipment and post-shipment financing needs

3. Approach bank or NBFC for suitable facilities

4. Decide on hedging and insurance options

5. Maintain finance log for future shipments

By planning financing upfront, SMEs can avoid cash flow crises and scale operations confidently.

Common Pitfalls to Avoid

With financing strategies in place, SMEs can now manage risk and protect shipments to ensure smooth international operations:

Read: Insurance & Risk Mitigation for IMPEX Businesses