Export Factoring in India

– Paving the way to provide easy finance to exporters

By Simran Jalan (simran@vinodkothari.com)

Introduction

Export factoring bundles together credit protection, export working capital financing, foreign accounts receivables bookkeeping and collection services- all in one product. It is the sale of foreign accounts receivable by a seller (exporter) to a factoring company at a discount, where the financier (factor) assumes the risk of default of the foreign buyer and handles collection on the receivables. The factor will purchase the accounts receivables or invoices, which are raised once the exporter ships the goods to the buyer (importer). Export financing is usually without recourse wherein the financier takes the payment risk of the importer.

Export factoring is a financing solution available to the exporter which allows the exporter to offer open account terms, a better liquidity position and allows it to be increasingly competitive. It can also be viewed as an alternative to export credit insurance, long-term bank financing or other high cost debt.

Export factoring allows trade to be carried out on open account terms and assists especially where there are short-term sales of products and where there may be risk of non-payment. It eases the credit and collection troubles in case of international sales and accelerates cashflows thereby assisting in credit risk mitigation and provides liquidity in the business.

Process flow

In export factoring, an exporter sells receivables due to it from the importer by transferring or assigning them to a third party called the Export Factor. This fulfils the exporter’s immediate liquidity requirements, reduced credit burden and provides for better financial planning. Additionally, the exporter’s risks associated with the international trade are also transferred to the export factor.

The exporter sells goods to the importer and raises invoice on the importer. The importer agrees to pay the exporter at the end of the agreed credit period. The exporter sells the receivables to an export factor without recourse and receives a certain percentage of the invoice value upfront. At the end of the maturity period, the export factor collects the payment from the importer.

Advantages of Export factoring

Why is demand for Export Factoring rising?

Export contributes approximately 20% in India’s GDP. In October 2018, 22 of the 30 export sectors monitored by the Indian Ministry of Commerce saw positive growth. Exports from India edged up by 0.8% year-on-year to USD 26.5 billion in November 2018[1]. Therefore, it is worth noting that the export business is proliferating and the exporters require steady working capital to sustain competition. This is where the need for export factoring crops up.

Currently, the exporters are increasingly becoming more comfortable with export factoring and therefore, the demand for export factoring in India is rising. However, the export factoring in India, if compared globally, is growing at a very slow pace. The reasons for this slow growth are discussed below in the article.

Global Scenario

According to the data from FCI’s 2018 Annual Review[2], in the year 2017, the factoring volume in China was as high as 64.80 billion EUR for the international market (both export and import). In UK, the total factoring volume was 291.83 bn EUR, out of which 32.43 bn EUR was of the international market. In India, the factoring volume for the international market was 0.427 bn EUR. Unlike India, export factoring has been the most popular factoring service world over. The following graph draws a comparison of the international factoring volume in India and other major countries.

Reasons for slow growth of export factoring in India as compared globally

Globally, cash credit and overdraft facilities are not easily available and hence the finance happens through factoring. Also, their legal system is strong to back such a facility. However, in India, cash credit and overdraft facilities are more acceptable to the borrower. Debtors do not easily accept the assignment and are not ready to pay directly to factors. Even the banks have apprehensions about factoring and consider it as a competitor.

The NBFC-Factors providing export factoring services are financed by the banks. The banks charge a high rate of interest to the NBFC factors. The NBFC Factors, further, charge additional interests on it. Therefore, the exporters receive the factoring facility at a very high rate of interest. In the global scenario, the cost of funding is low. The exporters receive the amount at a low rate, say 4% or 5%.

Further, there are no significant players in Indian market. And even those under operations function on a very small scale.

Major Players

The following are the major players providing export factoring services to the Indian exporters to provide them easy access to steady working capital.

Based out of United States of America

Drip Capital[3] offers finance to Indian exporters selling to buyers in North America, Europe, Middle East and the Asia Pacific. Drip Capital has built a strong presence across India having financed over $100 million of trade across export domains in the following four industries:  Garment and Textiles, Processed/Packaged & Frozen Food, Engineering Products, and Agro Commodities. The seller is required to fill an application form by providing their business information and the details of the buyers. Once, the application form is filled, their credit team evaluates the application form and accordingly, approve the credit limit. The approval of finance is based on the export performance of the exporter and the buyer’s credit reputations. After the approval of the credit limit, the exporter is required to submit its invoice along with lading or airway bill and it shall receive and advance disbursement of up to 80% of the net invoice value within 24 hours.  Drip Capital provides a credit limit up to $2.5 Million.

An exporter who utilises Drip Capital’s finance facility will have to bear three types of charges:

  • Processing fee- this is a one type fee and it ranges from 0.4% to 1% of the total credit facility that is approved.
  • Factoring fee- this is charged for each invoice. The amount that is levied ranges from a low of 0.4% of net invoice value to 1% of net invoice value.
  • Interest- this ranges from 4.5% to 9% per year. It is calculated on the actual number of days for which the finance facility is utilized.

The fees and charges are not collected upfront. They are deducted from the payment that is made to the exporter when the amount is received from the buyer. The processing fee is deducted at the time of the first such payment. At the end of the payment tenure, when the payment is received from the importer, Drip subtracts charges and remits balance amount to the exporter.

RTS International[4] provides customized financial solutions for international clients exporting product to the U.S. and Canada. Once the title is transferred to the importer, the exporter generates an invoice for sale. The exporter sells the invoice to the Company and gets paid 80%-90% of the total invoice value upfront. At the maturity period, RTS International collects the money from the buyer and returns the reserve balance to the exporter minus a fee for assuming the collection risk. It solves short-term cash flow issues for exporters in a variety of industries, including manufacturing, textiles, transportation, agriculture and seafood.

RTS International has an average monthly exporting volume of $200,000 or more in U.S. dollars. Besides the factoring fee, RTS International charges an ancillary fee. Factoring fees are determined by monthly volume, creditworthiness of the buyers and other conditions. Most contracts have an annual renewal fee.

Based out of Germany

Tradewind[5] (formerly known as DS-Concept) is a global provider of trade finance solutions for SMEs. It offers non-recourse international export factoring. It helps the companies to accelerate cash flow, improve collections and control exposure to bad debts. Tradewind evaluates the credit worthiness of the importer and sets a credit limit on the exporter. The exporter submits its invoice and receives payment with 24-48 hours. It provides factoring service on a non-recourse basis. The exporter’s invoice is purchased in exchange for an advance of up to 95% of the total invoice value. Once the invoice is paid in full by the importer, Tradewind send the exporter the remaining balance.

Based out of United Kingdom

Stenn International Limited (“Stenn”)[6] is non-bank trade finance provider specialized in cross-border trade. The buyers receive open account terms, allowing later payments, while overseas suppliers are paid earlier with the guarantee of payment in full. This creates working capital without tying up valuable credit lines or using collateral. It purchases invoices on a non-recourse basis and the exporter receives up to 100% of the invoice value less a small discount at shipment of goods.  The importer receives goods from the buyer and convert them to revenue without tying up availability under existing credit lines or outlaying cash for procurement. As per its press release[7] dated April 20, 2018, it recently closed $10 million in new factoring and supply chain facilities with clients in varying industries and countries.

PrimaDollar[8] is a UK-based trade finance platform working with exporters and importers on a global basis. The exporter receives payment from PrimaDollar at the time of shipment against the shipping documents. The importer pays the company the invoice amount at the end of the agreed credit period. The company takes the buyer credit risk and they work on a global basis. PrimaDollar is a trade finance company. Both international factoring and trade finance offer solutions to support the international supply of manufactured goods, like garments, household goods, consumer electronics or any other merchandise that is generally shipped and sold in shops to retail customers. Both international factoring and trade finance products help to address the cash flow gap that the exporters face.

Trade finance, is a significantly better solution for the emerging markets supply chain than alternatives like international factoring.  This is because the cost of trade finance is a lot cheaper than international factoring. In trade finance, the typical cost involved is 5% to 12% per annum depending upon the importer’s location, credit quality and size of the purchase order. Whereas, in case of international factoring, the typical cost involved is 10% to 24% pe annum.

Regulatory Framework

Factoring Act, 2011 (Factoring Act)[9]

As per section 2(p) “receivables” mean all or part of or undivided interest in any right of any person under a contract including an international contract where either the assignor or the debtor or the assignee is situated or established in a State outside India; to payment of a monetary sum whether such right is existing, future, accruing, conditional or contingent arising from and includes, any arrangement requiring payment of toll or any other sum, by whatever name called, for the use of any infrastructure facility or services.

In accordance with the provisions of the Factoring Act, a Factor, Client or a customer may be located outside the territory of India and such a transaction shall be governed by the provisions of the Factoring Act and Foreign Exchange Management Act (FEMA).

As per section 31(d) the provisions of the Act shall not apply to foreign exchange transactions except receivables in foreign currency.

The Factoring Act provides that ‘banks’, as defined in the Banking Regulation Act, 1949 are not required to be registered as factors for the purposes of carrying out the factoring business. However, Non-Banking Financial Companies (NBFCs) engaged in the factoring business are required to be registered in accordance with the provisions of the Factoring Act. The factor commencing the factoring business shall obtain a certificate of registration from RBI.

However, this Act extends to whole of India. Therefore, the overseas factoring companies providing factoring services to the Indian exporters are not covered under the Factoring Act.

Further, section 19 of the Factoring Act states that every factor is under the obligation to register themselves with the Central Registry set up under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFESI) and file the particulars of every transaction of assignment of receivables in his favour with the Central Registry. Further, upon realisation of the assigned receivables or settlement of the claim against the debtors, the Factor would be required to file for satisfaction of the assignment of receivables in its favour, in such manner and subject to payment of such fees as may be prescribed in this behalf.

Since, the overseas factoring companies are not covered under the Factoring Act, therefore, the companies are not required to register themselves with the Central Registry.

Foreign Exchange Management (Export of Goods & Services) Regulations, 2015 (FEMA Regulations)[10]

  • Declaration

Section 3 states that in case of export of goods, the exporters are required to furnish a declaration to the specified authority containing the true and correct material particulars including the amount representing the full export value.

Further, in case of export of services, the exporter may export the services without furnishing any declaration but shall be liable to realise the amount of foreign exchange which becomes due on account of such export, and to repatriate the same to India.

  • Realisation and Repatriation

The exporter of the goods or services shall take all reasonable steps to realise and repatriate to India the amount of foreign exchange which is due or has accrued to him within 9 months from the date of such export.

In case of export factoring, the exporter receives around 80%-90% of the invoice value upfront and once, the export factor collects the amount on the maturity date from the importer, the reserve balance is received by the exporter. However, the exporter shall be responsible for realisation of the full export proceeds within 9 months from the date of raising the invoice.

Conclusion

Factoring is now universally accepted as vital to the financial needs of small and medium-sized businesses. It has the support of government offices and central banks throughout the world. As international trade continues to increase, the opportunity for the factoring industry is growing at the same pace. Because international factoring works in a similar way to domestic factoring, exporters have realised that it can help them to become more competitive in complex world markets. Further, with the growth in exports, the demand for export factoring has also seen a major rise. However, India is still laid back as compared to export factoring market globally.


[1] https://tradingeconomics.com/india/exports-of-goods-and-services-percent-of-gdp-wb-data.html

[2] https://fci.nl/downloads/Annual%20Review%202018.pdf

[3] https://www.dripcapital.com/products/export-factoring/

[4] https://www.rtsinternational.com/page/about-us

[5] https://www.tradewindfinance.com/

[6] https://stenn.com/

[7] https://stenn.com/archives/742

[8] https://www.primadollar.com/

[9] https://indiacode.nic.in/bitstream/123456789/2116/1/201212.pdf

[10] https://www.rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=10256

You can refer our factoring page here.

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