Is export factoring a superior choice to other forms of export credits?

International trade offers remunerative opportunities to the traders but also demands resilience and strategically planned execution from them. Out of a multitude of stumbling blocks that exporters face, procuring finance and mitigating payment risks are the most cumbersome for them.

According to a trade and finance report in 2016 by the ICC, almost 80% of the global trade functions with the strong support of export finance. Exporters, until now, have always been dependent on the traditional export credit methods extended to them by the banks, private financial institutions, and government agencies for their short-term, medium-term and long-term needs, against collateral or assets.

What is the export credit?

Financial loan acquired by the exporters through banks or financial institutions against collateral or security has always been the prevalent methods of procuring export credit.

Lack of assets or collateral to be presented to the banks as security to procure credit by the small companies gradually made way for a relatively newer method of accessing financial support. This method is known as export factoring.

Though it is yet to be accepted by the Indian exporters without apprehensions, it is undoubtedly gaining momentum around several countries in the world as a complete financial package.

What is export factoring?

Export factoring is a tool, which enables the exporters to procure short-term financial assistance against the bills of exchange, to be received by them, under open account payment terms from the importer, after they have delivered the goods.

It is not a pre-shipment but post-shipment finance for the exporter. And the factors contributing credit cover three services under it, i.e., finance, credit protection, and follow-up services.

Critical factors of export factoring:

  • A tool to raise short-term finance
  • A seller sells his receivables to a factor for immediate cash
  • After deduction of the fees and charges the exporter receives up to 90% of total receivables immediately once the factor approves the papers, the rest of the amount goes through clearance once the shipment is complete to the satisfaction of both parties.
  • The credit is an open account receivables system and can extend beyond six months.

How to qualify for export factoring?

There are no qualification criteria for export factoring. First-time exporters or SMEs can avail export factoring without any cumbersome documentation process, yet there are certain criteria that exporters applying for export factoring should meet –

  • The factor considers the importer’s credibility with whom the exporter is dealing.
  • No bank has secured the accounts receivable.
  • The payment terms are under open account credit term.
  • There is a valid contract between the buyer and the exporter.
  • The seller sells his receivable to a third party, i.e. the factor

An exporter dealing in gems and jewelry cannot opt for export factoring, as these items are not amenable to factoring. The exporters mandatorily have to share each detail regarding the agreement, debtor, sales agreement, the term of payments and the exporter’s performance history to acquire financial assistance through export factoring.

How is export factoring different from traditional export credit?

Traditional export credit is not available without collateral or security whereas the only major requirement under export factoring is a valid agreement between the exporter and the importer under open account payment terms.

Banks or financial institutions under the traditional export credit do not provide credit protection, collection facility or unsecured finance to the exporters, unlike export factoring.

Unlike the traditional methods of procuring credit, finance is available in the invoice currency and is actually cheaper for the Indian companies as the interest rate is based on London Inter-Bank Offered Rate, i.e. LIBOR, which is significantly lower than the Indian interest rates.

Factoring, however, is not a replacement to procuring finance through banks but instead acts as a supplementary method to garner working capital.

When taking credit through traditional export credit methods, the exporters have to protect themselves against importers default by taking an insurance cover from an agency. It involves cumbersome documentation process for two separate institutions whereas export factoring provides a complete financial package to the exporters.

Why is export factoring a preferred choice?

Export factoring presently is a recognized and accepted method of open account receivables financing all across the globe. A systemic and methodical set of rules and procedures is applicable for governing it. It assists exporters to avoid credit losses by mitigating their collection and credit risks to a third party.

There are several reasons why export factoring is gradually becoming a preferred choice of procuring short-term finance all around the globe. These reasons include –

  • Elimination of the risk of non-payment as it is against accounts receivable.
  • It helps exporter to avail immediate cash.
  • It charges interest only against the funds provided. There are no hidden costs.
  • Operating costs become minimal as the factor takes over the risk of collection debts
  • It is not a kind of credit instead is an advance against the bills receivable
  • Immediate liquid cash becomes available within 24 hours against presentation of accounts receivable
  • Does not require any assurance from any bank or other financial institution
  • It does not put the financial burden on the exporters like traditional financing methods.
  • The process of procuring credit guarantee through export factoring is straightforward and simple
  • It enables the exporter to cover his payment risk and have adequate cash flow
  • It assists those small exporters or MSMEs that do not have the back up of assets to procure immediate cash without any collateral security

Export factoring in India

Export factoring in India has still to gain recognition. Some exporters are unaware of it being a method to procure cash against accounts receivable. Some are apprehensive about its process and its expenses. According to estimates, there are only 30 to 35% exporters in India who are aware of export factoring. Countries like China, Germany, France, Brazil, Taiwan, and Italy have well recognized the advantages of export factoring. Though, it still has to be accepted by the Indian exporters.

India presently has seven institutions that are members of FCI [Factors Chain International], the global association for providing factoring services. Germany has 190 such institutions, yet India is poised to take off on it.

An endnote

Trade finance is an integral part of international trade. Thus, export factoring has emerged to be the most lucrative alternate for exporters. It is for those who want to avail liquid cash, an advance against their invoice without any risk.

How MSME exporters can benefit from India’s FTAs?

Free Trade Agreements are immensely beneficial to the MSMEs operational in the country. They result in increased export revenues and investment flow on the one hand and strengthen harmonious trade relations on the other.

Over the last five decades, Indian MSMEs have dynamically emerged to become the most empowering sector of the economy. They are the most stabilizing sector generating consistent revenues by providing employment opportunities at the widest scale.

Thus, MSMEs in India play a significant role as the catalyst for the transformational changes in the economic development of the country.

The deep-rooted role of MSMEs in the economic development of the country can be well-perceived by the NSSO survey of 2015-2016, which indicates that there are a total of 6.3 crores MSME’s in India generating employment for over 111 million people. They contribute over 45% to the total industrial production and almost 40% to the export revenues and also account for 30% GDP of the country.

MSME exporters

All micro, small and medium enterprises involved in the export of goods and services from India are MSME exporters. The MSME Act in India became functional on 2nd October 2006. They are classified into two categories namely manufacturing enterprise and service enterprise.

Challenges faced by the MSME exporters
Even though MSME exporters have contributed substantially to the country’s revenue and have had remarkable growth, they have had to resiliently face certain challenges that have limited their growth quite a bit, over the years. Some of the problems that became a hurdle for the MSME exporters are:

  • Lack of implementing innovative technology in the quality and packaging of the products as per the international market
  • Lack of awareness of the existent international trade agreements
  • No knowledge about the export promotion and assistance programs initiated by the Indian government
  • No familiarity with the regulatory framework of the countries sought to be traded with

A strategic action plan is already being implemented to remove all limitations that are hindering the progress of MSME exporters. But besides this, it is also essential that MSME exporters utilize the benefits offered by India’s FTAs to increase their financial returns.

FTAs

Free Trade Agreement is a deal or an agreement between two or more countries or a trading bloc that taxes, regulatory laws, quotas and preferences on goods and services to be traded between them will be reduced or eliminated to foster better trading relations and returns.

FTAs may also include clauses with respect to intellectual property rights (IPRs), investments, government procurement, etc.

Important features of FTAs

Under FTAs, markets are opened completely, and the FTA partners get advantageous reciprocal trade.

  • Removal of Import and export duties on several products
  • The partner countries are treated equal even if they are at a disparity on socio-economic levels.
  • Partner countries cannot discriminate between their domestic companies and foreign exporters.

Benefits of FTAs

Countries that enter into FTA agreements benefit in a number of ways. The countries that enter into FTA get easy access to each other’s market due to the reduction or removal of tariff and non-tariff barriers. Other beneficial aspects of FTAs for countries are-

Easier access to markets

The low prices owing to tariff cuts place the products of the partnering countries more advantageously thus bringing new trade opportunities. Thus, entry to the markets of partnering countries becomes easy and hassle-free.

Low tariff barriers

Tariff barriers inhibit trade and make products costly. By reducing these barriers the countries that are participants in the agreement experience the free flow of trade and in result their economies flourish.

Low cost in importing raw materials

Raw materials essential for products may be available at lower prices in the markets of the partnering countries. This makes imports of raw materials cheaper, which in turn reduces the cost of a product.

Countries india has a free trade agreement with

Though India has not entered into any new FTA for the past three years, there are several countries India has a Free Trade Agreement with. The countries are-

  • Sri Lanka
  • Singapore
  • ASEAN [Association of South-east Asian Nations]
  • Malaysia
  • Japan and Korea
  • Bangladesh
  • Bhutan
  • Nepal
  • Thailand
  • Maldives
  • Afghanistan
  • Pakistan
  • South Korea
  • Chile

FTA is under negotiation with countries-

  • Canada
  • Peru
  • New Zealand
  • Israel
  • Europe

MSME exporters and India’s FTAs

MSME sector contributes majorly to the revenues and economic development of the country, as they are the biggest sector to generate employment. Thus, it is essential that the existing or new free trade agreements of India contain provisions to bring maximum growth opportunities for the MSME exporters of the country.

To extract the maximum benefits of the FTA, it is therefore essential that MSME exporters go through each provision of the FTA and assess how it can be used.

Out of 28.5 million MSMEs in India, 25 million are micro-enterprises that cannot compete against the enterprises from developed economies.

The key provisions in an FTA can significantly affect the MSME sector and the MSME exporters in India. Following are the provisions and how they may affect the functioning of the MSME sector:

Import duties

Since the MSME sector lacks a well-secured marketing facilities network, increase in import competition with partner countries infiltrating the domestic markets can pose a big threat to the Indian MSME sector. “Most MSMEs do not have money to invest in market research, advertisement, packaging and are unable to carry out design and technical improvements to keep up with market demands” (P.254, SIDBI, 2010a). However, in certain situations, FTAs may also have a detrimental effect on MSMEs.

Import duty cuts for a partner country can cause a threat to domestic MSMEs. For example, toy imports from China, flooding the Indian market, came as a major setback for the MSME toy industry in India when applied duties were removed.

Non-tariff barriers

MSMEs in India lack the facilities to produce as high standard goods as produced in the developed countries. FTAs have stringent norms regarding standardization and quality of products. It becomes easier for MSMEs to standardize their products, as there are clear rules as per FTAs regarding the quality of products. By complying with the quality standards according to the FTA, MSME exporters can indisputably enter the markets and increase their export turnover.

Rules of origin

Rules of Origin identify the originating region or the country of the exported goods. Since Rules of Origin are different under each FTA, to receive preferential benefits, MSMEs must meet the required Rule of Origin applicable to specific products and the specific FTA.

MSME exporters can only ensure benefits from India’s FTAs through strict compliance of quality standards including packaging facilities. To get the maximum benefits of FTAs, they can take help of the government schemes to facilitate their production and quality standards and answer to the following questions can help them further:

  • What is the HS code of their product?
  • Which countries have India FTAs with?
  • Is the product they manufacture being imported into or being produced in the partner countries?
  • Is their product on the sensitive lists (not included in the duty cuts) in the signed FTAs?
  • Have duties been reduced to zero in India or the partner countries?
  • Are their products competitive in terms of prices and quality as compared to FTA partners?
  • What is the current duty on their product in the partner country?
  • Will duties be less on their exports to FTA partners?

An EndNote

FTAs serve the vital purpose of reducing trade barriers such as quotas or tariffs between countries. Lowering trade barriers helps the partner countries to boost their outreach and increase their sales. They witness a wider range of products and at lower and more competitive prices under an FTA. MSME exporters can benefit from the FTAs if they skillfullymaneuver the provisions in the FTA after understanding them intricately.

How to deal with payment defaults in exports?

Challenges and restraints have always surrounded international trade yet global growth, owing to the exchange of goods and services over borders, has been dynamically significant over the years. The proactive approach, adopted towards globalization and international trade, by the emerging market economies has been the reason why outcomes have been this positive and promising.

Exports and payment defaults

There has been a consistent growth of exporters in the Indian subcontinent, over the years. The benefits exporters derive outweigh the difficult tasks that are required to be handled by them.

Even though there are systematic payment methods to safeguard the interests of the exporters, owing to a lack of trust between the international traders, default in payments may pose a serious challenge for the exporter.

An export procedure beginning with the registration of export business ends when the goods are delivered to the importer, procuring payment in return. During this process, an exporter may face careless or unforeseen and unavoidable challenges. To overcome these hurdles, an exporter has to be resilient and well prepared.

The approach exporters can take to avert payment defaults

Whereas the most worrisome feature of international trade for importers is the procurement of high-quality goods at competitive prices, for exporters it is the timely payment by the importer after they have dispatched the goods.

How much an exporter can safeguard his payments is directly correlated to the type of approach he takes as his business strategy. An exporter can adopt a reactive or a proactive business approach, or a blend of both strategies to deal with the risk in payments. Thus, either the exporter can wait for the importer to default in making payments and then take measures to deal with it or can take precautionary measures beforehand to safeguard his payments. Of course, taking proactive measures tends to minimize the chances of having to take recourse of reactive measures at a later date.

Proactive approach

A proactive strategy is always more effective to meet the challenges of payment default because they involve prior preparation and take into account all possible challenges.

Exporters have to be very careful while agreeing on several aspects. It includes a method of payment, the terms, and conditions in the contract, ensuring their bills of exchange or documents. Also, exporters must keep in mind the countries that have a high default rate in payments.

A. Payment method

It is crucial for an exporter to agree to the payment method that is either completely safe or holds minimum risk. Given below are some methods through which exporters receive payments in international trading.

Clean payments
Under this payment system, the transfer of related documents is direct between the importer and the exporter and the bank is only involved in clearing the amount. Clean payments can be as an advance payment by the importer or as an open account in which the payment is given by the importer only after he receives the goods.

Documentary collections

Under this payment system, the banks hold the concerned documents to be released to the importer only when they clear the payments. It may be against payment D/P or acceptance D/A, i.e., against acceptance of a draft.

Letter of credit

Under an L/C, the importer assures the exporter, through a legal negotiable instrument, that he shall receive payment after completing his end of the agreement, by the importer’s bank.

The exporter can also use the letter of credit as a form of export credit. To improve his cash flow or to meet any unavoidable expenditure, the exporter can present the letter of credit to a bank for it serves as collateral and takes a credit against it.

B. Drawing the contract

To overrule any potential confusion between the exporter and the importer and to help resolve any difference, it is essential to draw a written contract between the two rather than just a verbal agreement.

While framing an agreement or a contract, many facets require coverage to eliminate the risk factors associated with exporting. The contract should be clear about what and when also enclosing the responsibility for both the parties.

Included in the contract must be the goods and the quality compliance they have to meet. The details regarding the price such as the amount, the currency and the exchange rate, terms & conditions regarding the payment. It should include when and how, delivery terms, shipping costs, custom related conditions, and insurance details covering the party to bear the risks and the type of risks to be borne by each party at every stage.

Besides this, the contract should include the procedures to settle disputes in case of any defaults made by the parties and the place where legal proceedings shall be conducted in case of a legal dispute.

C. Credit insurance

In International trade, it is always easier to avoid the risk factor before it has occurred. To safeguard their payments, even if the importer defaults in making a payment, it is essential that an exporter ensure the potential risk of non-payment by the importer by export credit insurance (ECI).

ECI is a kind of conditional assurance to the exporter. In case an importer fails to make the payment arising out of any political or commercial fluctuation, the exporter shall receive his payments.

D. Norms of the importing country

Each country has a different set of laws and regulations that govern its functioning. It is essential for an exporter to understand and gain knowledge about the importing country. The exporter should formulate a written contract accordingly and well substitute any contingent law of the importing country.

Reactive approach

The foremost step of an exporter should be to communicate and negotiate with the importer. The exporter should look for good terms and convince him to make the payment. When communicating with the importer, the exporter should be willing to compromise on a few unreasonable demands of the importer. Also, if the need arises, as it would save the exporter from incurring substantial losses from non-payment.

If however negotiating with the importer fails and the sum is large, the exporter could obtain assistance from several sources. It could be of its bank, qualified trade experts, trade commissions, recovering agencies or legal counsel.

A. Recover from insurance policies

To mitigate the risk of non-payment, the exporters can opt for account receivable insurance policy to be used in case of default in payment by the importer. The insurers, under the ARI policy, pay the exporter if the importer does not pay owing to fraudulent intention.

One such central government undertaking body in India is the Export Credit Guarantee Corporation. It ensures credit guarantee to the exporter against any possible default of payments by the importer. ECGC is more or less operates as an insurance agency. It guarantees payment to the exporter if the importer defaults in making a payment.

After both the parties have signed the agreement, the exporter approaches the ECGC. It is to get an approval and amount of limit. If the importer fails to make the payment, ECGC reimburses that amount to the exporter. Also, its operational network tries to find the cause of default. If the ECGC deems fit, they blacklist the buyer who makes it difficult for him to continue business. It is because it affects his creditworthiness in the market.

B. Protection with ‘without recourse finance’
When an exporter is unfamiliar with their buyer’s bank or is involved in trading with a country where political risks are considerable, then they can opt for without recourse finance. This protects the exporter from default payments against L/C.

C. Legal channels

Certain countries have stringent laws. It may be difficult for an exporter to recover the lost amount from the importer belonging to such countries. It is essential for an exporter to sign a contract with the importer of such countries. Sometimes it is also better if the exporter builds a strong local network in that country. It helps them recover their amount from the importer.

The exporter can approach their embassy, Foreign Chamber of Commerce etc. and seek their intervention if the importer refuses payment. The exporter must present documentary proof in the form of a contract to the legal advisor. But, the exporter should seek assistance from these legal channels only when the amount is considerable or high.

There is a multitude of international agencies that extend their collection services against fees to the exporters against any possible default by the importer. Since the legal costs of processing such cases are high, collection procedures often recover very little of the outstanding amount.

If both the exporter and the importer agree, then they can take their dispute to an arbitration agency. It is better than the exporter taking legal action against the importer. The settlement of dispute via an arbitration agency will be quicker. It will be less costly than legal action, which could take too much time.
The International Chamber of Commerce does not belong to any single country and is therefore acceptable to all international traders. It handles major international arbitration.

An Endnote
Receiving timely and proper payment from the importer is the most critical aspect of the deal for an exporter. It is essential that an exporter treads and plans about this criteria delicately and meticulously. There are specific measures, which an exporter can take in advance. They can contact certain agencies or trade commissions after the importer has made a default in payment for due action and reimbursement of the amount through legal intervention.

Factors to keep in mind while approaching an international buyer for the first time

International trade accompanies robust challenges but lucrative returns. It takes patience and perseverance before one can establish a global enterprise. And as with any new business plan, crossing borders also involves a multitude of critical factors to be worked upon before one can begin exporting or importing, including thorough homework and pre-planning.

Firstly, to enter into business overseas, it is essential to find appropriate international buyers. This can be done by conducting extensive market research and determining the countries where the products would click.

There are several ways to approach a prospective international buyer for the first time. An exporter can communicate with a buyer through written communication, i.e., via e-mail, or through oral communication, i.e., via telephonic conversation.

Ways to approach international buyers

An export order can be solicited from an international buyer through any of the following ways-

  • Direct mail

A foreign buyer can be approached through an email, informing them of the products and about the intent of the exporter to form a business deal with the buyer.

  • A personal visit

An exporter can schedule a personal visit to the buyer’s office with complete details including sample product, prices, delivery schedule, printed materials containing details as suggested.

  • A telephonic conversation

Another effective technique is to have a conversation with the importer on a telephone or Skype [international software used for business communication].

  • Participating in trade fairs

International trade fairs are held in India as well as on foreign grounds. The exporter can approach the foreign buyer through a trade fair.

While contacting a foreign buyer, there are a number of obstacles that may pose an impending threat, including

1.The cultural and socio-economic differences
2. The methodology of conducting business
3.The time difference between the two countries and
4. Barriers to language are a few aspects that create difficulties in trying to impress a buyer, the very first time.

How to overcome communication obstacles effectively?

The ulterior motive of the exporter is to gain credibility and develop trust in the buyer to procure an import order. Since there are many sources of potential confusion between an exporter and a foreign buyer, from language difficulties to differences in business practices, an exporter has to be meticulous while communicating with the buyer. This involves the following steps:

      1. The exporter should be proficient in the English language

English is a global language and the most prevalent form of business communication all across the world. An exporter should be proficient in both written and oral English. If the exporter lacks advance knowledge in the language, they should take help of a professional writer for drafting email intent or an interpreter for acting as a bridge between the exporter and the foreign buyer.

Any mistake in the communication or presentation oral or written can cause the international buyer to shirk away, even if the products offered by the exporter are credible as business is about efficiency and marketing. Proficiency in English is one of the most important prerequisites to communicating and impressing an international supplier.

        2. The direct mail should be clear and precise

The exporter can contact the buyer by drafting an email that contains information about the product, the terms, and conditions of the exporter and an intent displaying interest and negotiation. The email sent should be unambiguous and correct with impressive content.

  • An email is the first business communication with the prospective buyer and thus should include all aspects of the products and trading but in a polite language. It is always better to start the introduction with a formal salutation and with a direct approach.
  • The exporter must highlight all the outlines of the product.
  • Written communication via an email should not include slang and clichés but should be simple and descriptive. And it should have content to empower the buyer in the first few sentences. 


    3. The exporter should have authentic and proven contact details

When contacting the buyer for the first time, it is essential that the exporter provide ample contact information including a Skype ID. Foreign buyers are unknown to the exporters, and they require legal proof that the exporter vying for their order hold legible identity in his country and is not a fraud. A LinkedIn profile can also prove to be helpful to satisfy the foreign buyer.

         4. The exporter should accustom themselves to the cultural and time differences:

When contacting for the first time, it is vital that the exporter adjusts his time to the buyer accordingly. A little insight into the cultural background of the country and some common terms and words in the native language of the buyer could help the exporter to break the ice of unfamiliarity.

          5. Details about the products should be formidable

A skillful presentation of the products and the exporter’s in-depth knowledge of the market pulse can impress a buyer. The manner in which an exporter benchmarks their products in comparison to other products in terms of quality, price and availability should be transparent. This makes the international buyer believe in the exporter’s business sense and acumen.
The exporter should be intelligent enough to add some scintillating negotiating deals and offers.

An EndNote

An exporter vying for an international order must prepare well with all the details. The preparation goes in for the product and its presentation, terms, and conditions and intent to crack a deal. These are beside him being affluent in the art of creating a potent impact on the buyer with his personality and sincere efforts.

 

 

Handling delays in exports

India is the 14th largest exporter in the world and is all set to climb up to be among the top 5 by the year 2030, says a recent report by HSBC. With exporters growing consistently in India, every other day, it is essential to understand that as an exporter there is a multitude of aspects to consider when dealing with international buyers with the most crucial part being the compliance with the legal norms of the importing as well as their own country. Other than that there are several other details to be contemplated and worked upon so that they do not pose a challenge to the exporter.

The export procedure begins right from when an exporter registers his business to until the delivery of goods to the importer. During this process, an exporter may come across delays in steps of the process, due to negligence or unavoidable reasons. And it is only with due diligence and knowledge of ways to overcome the challenges that an exporter can move ahead with the shipping of the merchandise without many glitches.

Delay in business registration

Before one can begin functioning as an exporter, it is essential they register themselves as a business. Since proprietorship and partnership are classified as unregistered business, and importers prefer dealing with a registered entity, it is recommended that an exporter register them as a private limited company. But registration as a private limited company is not mandatory. To begin exporting one can register their business as proprietorship or partnership also.

After the business registration is complete, i.e., the exporter receives the CIN number it is essential that the exporter applies for a GST registration, PAN and TAN number. The entire registration procedure takes 10 to 15 days, and the cost involved is a minimum of rupees 10,000 and beyond.

There are no application charges for registration of GST, which is mandatory for companies having a turnover of more than 20,00,000 INR a year. In case the exporter fails to obtain GST number, they may be liable to pay 10% of the tax amount as fine or 100% if it was a deliberate evasion.

The exporter may get stuck by unnecessary delays in the business registration. These delays may be because of failure to comply with all the mandatory submission of documents, any incorrect or false declaration in the application form, not providing correct information, any false declaration, or the draft/ fees not coming through.

The exporter can avoid these delays by processing the application form through a qualified CA or registration agent or lawyer by ensuring a crosscheck of all the details before submitting the form and documents.

Delay in IEC (DGFT)

For an exporter to begin, it is paramount that they register themselves with the DGFT, i.e., Director General of Foreign Trade, Ministry of Commerce, Government of India. It is only after the unique ten-digit code issued by the DGFT referred to as an import-export code, that the exporter is considered legible to begin exporting products.

The mandatory documents required to be submitted along with the application form are:

➢ The PAN number of the applicant
➢ Identity proof
➢ Address proof
➢ Photographs of the applicant
➢ Current bank account number
➢A canceled cheque bearing the name of the applicant

On submission, the process takes minimum two to three working days to get processed, and the exporter may receive his IEC number within a week.

The exporter after procuring an IEC number should register with an EPC, i.e., Export Promotion Council to receive export-import benefits or concessions under foreign trade policies. The registration can be done by submitting the following:

➢ IEC certificate
➢ Certificate by a chartered accountant certifying the export turnover of the exporter in the preceding year
➢ Membership fee
➢ List of partners or directors if the exporting concern is registered as a partnership or a private limited company

If there is a delay at the end of the DGFT, the reason may be an error in filling the application form or a document may not be authentic. Sometimes the delay may be because of an error in the draft as application fees.

The exporter would, in this case, be required to rectify the errors and re-submit the application form. Any delay in REPC registration may be because of any incomplete detail or documents and can be rectified by re-filing the details and re-submitting the correct documents to the concerned department.

Delay in financing

The government has simplified export finance and given preference over any other types of finance, owing to the foreign exchange earnings they bring into the country. The institutions that are directly or indirectly involved in financing for exports in India are –

  • Export-Import Bank
  • Commercial banks, both nationalized and non-nationalized
  • Development banks such as IDBI, ICICI
  • Small Industries Development Bank of India
  • State Finance Corporations
  • National Small Industries Corporation
  • Export Credit Guarantee Corporation

Finance for exports can be availed in the following five ways:

Pre-shipment export finance

This type of finance is given against a confirmed order from the importer in addition to an anticipatory letter of credit for a period of 180 to 270 days.

Post-shipment export finance

Against the export bill as the bill takes 3 to 6 months to realize. The bank may purchase, discount or collect the bill. This type of finance is given for a period of 180 days.

Export finance against a collection of bills

The financing bank finances exporters against FOB bills of exchange and can get compensation up to 80% of the total amount.

Deferred export finance

The banks finance the exporters for the full amount and keep receiving the part installments from the importer.

Export finance against allowances and subsidies

Exporters are given subsidies by the government to enable them to sell their goods to the importers at lower prices and are given allowances in the form of a duty drawback.

The exporter may encounter delays in the processing of finance due to several reasons such as-The bank is not satisfied with the bona-fides of the transaction

• The bank has doubts regarding the documents and considers this as a suspicious transaction.
• The documents are not in compliance with the registered rules and norms.
• The shipping documents have been delayed submission
• Or any other norms that somehow are not authentic while applying for finance, by the exporter.

The exporter only can handle the delays in finance by being very clear and precise in the documents submitted to the banks. The exporter should patiently meet all the formalities of the banks. Each document should be in accordance.

The delay in the procurement of finance can be solved by contacting the negotiating bank after complying with all the details missed out.

Delay in export documentation

An exporter is liable to meet all the regulatory requirements and documentation process mandatory in the importer’s country as well as their own country to avoid any delay in the export due to document delay.

The important documents necessary during the export procedure include-

➢ Bill of lading, which contains the details of the shipment
➢ Certificate of a manufacturer certifies that the exporter has manufactured the goods

➢ The commercial invoice is the most critical document in the export procedure containing all details from beginning to the end, such as packing details information about the shipment, the marks, and numbers as on the outside of the boxes and the value of the merchandise.

There may be other specific documents to prepare before exporting goods. The main documents along with the additional documents should be completed with the help of a professional to avoid any unnecessary delay and should be authentic and in compliance with the rules laid down in the export norms.

Delay in shipping

Transit time is one of the most critical features in logistics. The delivery of the merchandise at the opportune moment is essential. Out of the several modes of transport, i.e., rail, road, ship, air and multimodal, each mode of transport comes with its own advantages to the transit of goods.

The mode of transport is chosen according to the expected time to reach the destination, geographical distance of the importing country, the value, size, weight, and volume of goods. The delay in shipment may occur due to several reasons such as:

➢ Delay in the movement of the vessels owing to port congestion, bad weather conditions, or changes in the schedule because of the holiday season or any event
➢ Loading of shipment is not in the vessel out for delivery but on another vessel.
➢ Incorrect or negligent documents
➢ Poor coordination of freights
➢ Declarations in the customs are not authentic and may result in the delay of shipment in the customs
➢ Evasion in the export license

Ways to avoid delay in shipments

  • Add some time in advance to the expected delivery time as a precaution to unexpected delays
    • Evaluate factors regarding the holiday periods and weather conditions at the time of transit and accordingly plan the shipment
    • Double-check all the documents before submitting them to avoid any delay owing to incorrect information.
    • Appoint efficient freight forwarders and customs agents to take the paperwork and customs clearance through without any hitch.

Delay in receiving payments

The ultimate goal of an exporter is to receive timely payments from the importer, once the deal is complete. It is therefore vital that the payment method should be such that the risk of payment is minimal. Since the realm of risk is not very narrow in the international trade, the exporter cannot be precarious until the payments are secured in his bank account.
The three types of payment methods, most prevalent in the international trade are:

Clean Payments

The type of payment system has minimal involvement of the banks. They are only responsible for clearing the amounts. The transfer of related documents is direct between the importer and the exporter.

Advance payment

This is the most secure type of clean payment method. Here the exporter receives the payment as advance by the importer.

Open account

Clean payment method is risky. The exporter agrees to deliver goods to the importer prior to the payment without any responsibility of associated risks either.

Documentary collections

Here the exporters authorize the banks to release the relevant documents to the importer once their payments have been released. The banks release the shipping and other related documents to the importer.

Documents against Payment D/P

The release of documents only against payment by the importer

Documents against Acceptance D/A

The release of documents against acceptance of a draft

Letter of credit

Here the importer’s bank issues a guarantee to the exporter that he shall receive the payment. Thus, the exporter must meet the terms and conditions laid in the letter of credit.

Sometimes the exporter may face certain delays in payments. It is because of the importer refusing payment owing to any of the following reasons:

➢ Goods or documents are not in compliance with the importer’s request
➢ The importer has delayed or withheld payments purposely with an intention to cheat
➢ Importer going bankrupt
➢ Any other unforeseen delay arising out of political, commercial, or fluctuation in foreign exchange risk.
➢ Lack of coordination between the collecting and the remitting bank.

In case the delay in payment is because of any incorrect document then the exporter will have to bear the delay and rectify the mistakes in the documents. If the importer is delaying the payments without any reason, the exporter can protest the bill and take him to court or protest through the bank’s lawyer.

An EndNote

It is essential for an exporter to study the norms of the importing countries. It will avoid unnecessary delays or problems and adapt the business accordingly. But adding a professional to help exporter complete legal details and documents can help them in avoiding these hindrances.

 

 

Supply Chain Management for exports

With the advent of time, as the obstacles of international trade are gradually dissipating and new opportunities are making their way into the global markets, import-export companies are beginning to grow rapidly. These companies are intricately into the transit of goods from one country to another, yet their lucrativeness often suffers setbacks in the form of:

Time taken to transport the goods

Import-export companies often face challenges and problems at the destination port in the form of unnecessary delay or high charges by agents thereby resulting in more than stipulated time for the goods to reach the importers.

Mode of logistics

The mode of transport is one of the most critical aspects of international trade. Several contingencies affect logistics such as delays at the loading port, delay while transiting, or sometimes cancellation of the shipment vessel that cause problems for the importers and exporters.

These hindrances have spurred on the need for an effective and compliant supply chain management that monitors and deals with issues related to norms, procedures, documentation, customs, trade compliance, HTS classifications, freight and many more to minimize the obstructions in the transit of export orders. This specialized strategy is helping to enhance the margin of profits by increased customer satisfaction.

How does it work?

Supply chain management involves the skillful dispensation of strategies and leverages operations in the supply chain in order for an exporter to be successful in delivering the merchandise to the importer hassle-free.

Supply chain management is all about what an exporter requires, where an exporter requires when an exporter requires and how does the exporter utilize the human resources to process his order. Thus, it involves successful completion of the following systemic approach:

1. Managing the products

The exporter may be a manufacturer exporter or a merchant exporter or an export management company on behalf of the manufacturer. It is essential that any kind of exporter who enters the market have an infrastructure to make a regular and timely supply of the products he is looking to export. The exporter must meet the regulatory norms strictly for the products. It is also beneficial for the exporter to know well about government offerings on the incentives and the tax exemptions.

It is essential that an exporter work on the export cost to enhance profits and also on the export price at which the goods shall be offered to the international buyers or the domestic buyers in the form of merchant exporters.

2. Sample production and acceptance

The exporter may be required to send a sample to the importer for approval before the final order. It is essential that an exporter is well versed with the government regulations and procedures for sending an export sample.

The sample produced should meet all quality requirements as stipulated, and when being sent for approval, they should be marked as ‘sample-not for sale.’ The samples can only be shipped by airfreight or post parcel.

Export samples fall under three categories. First are the samples, which are within a value of rupees 10,000. They do not involve any foreign exchange, and the exporter must declare this.

Samples which are more than 10,000 but less than 25,000 require a value certificate from the bank stating that no foreign exchange is involved and the value of the sample exported does not exceed rupees 25,000.

Lastly, when the value of the sample is more than rupees 25,000 the exporter should obtain a GR/PP waiver from the RBI.
In case the samples are sent against payment then they are deemed as normal exports and require all formalities to be complied with.

3. Quality and certification requirements

It is mandatory that export products must meet the quality control and certification requirements both of the exporting country as well as the importing country.

The exporter may have to fulfill sanitary, phyto-sanitary requirements if the export product belongs to the food category-comprising animal or plant ingredients. When exporters export agricultural products from India, they should hold AGMARK certification and ISI 9000 mark of approval. ISI 9000:2000 is the present international norm of high-quality goods that has worldwide acceptance. Products belonging to the pharmaceutical sector must qualify under USFDA or EMA.

Without necessary quality certification, the goods to be exported may be rejected, and the exporter may incur heavy financial losses.

4. Managing documentation challenges

When exporters send goods internationally, they require precise and relevant documentation. It is of utmost importance that paperwork is in due compliance. The order as an error in them could delay the shipment. Managing documentation challenges methodically ensures timely delivery of goods.

  • The documents for payment {bank draft}, contact address and packing should have clear and precise information.
  • Classify the product under the correct system code.
  • Mention the units of measure and quantity authentically.
  • The commercial invoice should be true and with the correct value.
  • The product description should be in accordance with the letter of credit.
  • In the case of exporting any dangerous goods, the consignment should have a proper label.

The documents involved in international trade are:

  • Air Waybill
  • Bill of Lading
  • Combined Transport Document
  • Draft (or bill of exchange)
  • Insurance Policy
  • Packing List/Specification
  • Inspection Certificate

5. Financing

While engaged in exports, long payment terms can be challenging and cause problems in the working capital. Export finance through banks or financial institutions helps to release this working capital contingency and helps a business to grow.

The exporter can procure pre-shipment finance to carry on the manufacturing process without any glitch. It is available against an expected export order or a letter of credit. The two types of pre-shipment finance are:

Packing credit 

Packing credit is available in both Indian currencies as well as foreign currency. The maximum time a bank provides a packing credit is 180 days. It can further extend it to another 90 days at its discretion. The rate of interest is according to the amount of finance against the order. In case the exporter fails to liquidate the packing credit at the due date owing to any contingency the bank considers it as an overdue and initiates necessary steps to recover the said amount.

When the packing credit is in foreign currency the rate of interest is according to the London Interbank Offered Rate (LIBOR). According to the stipulated guidelines, the final cost of exporter must not exceed 0.75% over six months LIBOR, excluding the tax.

Advance against cheque or draft representing advance payments

The exporter can procure finance at a concessional rate from the bank. They can present an advance cheque or draft from the importer, till the time the proceeds of the advance payment get realized.

The exporter can also procure post-shipment finance from a bank or a financial institution. An exporter takes this finance after the export shipment has already been made. It is only taken for the period until the export proceeds get realized. It is more or less taken to fund oneself in advance against secured payments to be realized later.

6. Insurance Production management

With an insurance policy, the exporters become safe against the unforeseen risks that they may encounter during the course of exporting goods. Insurance coverage can come for the merchandise from the airline, logistics specialist or from the freight forwarder. They may also come from an insurance company that extends insurance coverage for the goods by an ocean or air cargo.

The insurance coverage is available under three forms, i.e., perils, broad-named perils, and all-risks. The most prevalent plan is the all-risk plan which all insurance companies or transport companies offer. This insurance coverage ensures goods against any loss arising out of external circumstances excluding loss out of natural calamities. The insurance coverage on aggregate costs 1 to 2% of the value of total goods.

7. Shipping costs and time

Selecting the most appropriate mode of transport is an essential aspect of the export procedure. The exporter must contemplate that the transit mode is in accordance with the merchandise they are exporting. The exporter should work around strategies that enable them to reduce the shipping time and costs.

To speed the shipments through delays in customs, the most effective strategy is to partner with an efficient freight forwarder. It could also be a customs broker or any other agent who can manage shipment documents in less time.

One must complete the documentation and formalities accurately. It will avoid any delay at the customs. Also, the mode of transport should be as per the transit time and value of goods.

Some other aspects that could help reduce shipping cost are-

Consolidate the shipping order such that a 40 feet container could be in use once a month, rather than shipping in small quantities a multiple times. This will help to reduce transportation costs and custom clearance fees.

Try and set the small boxes in one palette. This will help to reduce the weight and volume of the shipment saving costs.
Also, provide correct and factual information on the packing to avoid any delay of shipment.

An EndNote

Thus, there is a multitude of norms and regulations, which require compliance by the exporter. The supply chain management enables the exporter to meet all the requirements with precision so that high-quality goods can reach the importers without any delays and compromise, as efficiently as they can.

 

Quality and certification requirements and challenges across markets and products

International trade is governed by a paramount principle, which states that when products cross countries, they should comply with the regulations and quality standardization of the importing country or as per international standardization.

Over the years the technical and quality requirements of countries have become more integrated owing to the global demand for safe and high-quality products. Both voluntary and mandatory technical quality requirements need to be conformed to, as per international standards, by the producers and the exporters.

The mandatory compliance stipulation pertaining to sanitary, phytosanitary, environmental or technical requirements involving conformity assessment procedures such as testing, certification, and declaration of conformity, inspections and so on is crucial for exports.

Quality requirements are stringent

Different markets have different quality requirements for which they require different certifications. Once the products are ready to target the export markets, the exporter has to document reports that show that the products are in complete compliance to the quality standards of the importing country and also as per international standards laid down by certification agencies.
Both Indian and Foreign certification bodies carry out this conformity assessment procedure. It is only after approval and certificate by these bodies that exporters can ship their goods to the importing country.

Out of a wide range of products that are exported to other countries certain products, for instance, agricultural produce, food and drugs, wine, pharmaceuticals, and electrical products require certain quality regulations that need to be strictly complied with.

Some foreign certification agencies

  1. UNITED STATES FOOD & DRUG ADMINISTRATION [USA]

USFDA, The United States Food and Drug Administration, is a regulatory authority that regulates an array of products that enter the US market. Exporters have to mandatorily comply with the regulations laid down by the FDA to enter the US market.

The products that fall under the jurisdiction of USFDA are:

  • Food products such as dietary supplements, water bottled, additives used in food, infant food, food made of meat, poultry, and egg products.
  • Drugs including generic and over the counter drugs.
  • Biologics such as tissue and tissue products, vaccines, blood-related products, allergenic, etc.
  • Medical equipment, for instance, surgical and dental implant and prosthetics, and simple and complex technology-based items.
  • Electronic products that emit radiation, including microwave ovens, x-ray equipment, laser products, sunlamps, or ultrasonic equipment
  • Cosmetics, for instance, nail polish, perfumes, skin moisturizers, cleansers, and color additives used in personal care products.
  • Veterinary products including pet foods and livestock feed.
  • Tobacco products, such as cigarettes, smokeless and cigarette tobacco.
  1. EUROPEAN MEDICINES AGENCY [EUROPEAN UNION]

EMA, The European Medicines Agency, is equivalent to USFDA, in Europe. EMA is a regulatory agency to evaluate and supervise medicines to ensure human and animal health in the European Union. In order to enter the European market, the medicines or drugs must meet with EMA’s stringent regulations.

  1. EUROPEAN FOOD SAFETY AUTHORITY [EUROPEAN UNION]

EFSA, the European Food Safety Authority is a regulatory agency. It demarks the set standards for food and food products that enter the EU market. The level of pesticide residue, metal involvement, chemicals and other additives that could cause food products to be unsafe for consumption are governed by the EFSA including the standards set by GLOBAL GAP, i.e., for fruits and vegetable production.

  1. MEDICINES AND HEALTHCARE PRODUCTS REGULATORY AGENCY [UNITED KINGDOM]

MHRA, The Medicines, and Healthcare Products Regulatory Agency is an executive agency of the United Kingdom that ensures that medicines and medical devices that enter the UK are safe for consumption.

  1. Thai Food and Drug Administration lay down regulations regarding quality of drugs, food, cosmetics and narcotics in Thai countries.
  2. Federal Institute for Drugs and Medical Devices is a regulatory authority in Germany that sets regulations for the pharmaceutical products entering the country.
  3. Medical Products Agency, Sweden is a regulatory agency of Sweden.
  4. The National Agency for Food Administration and Control (NAFDAC), Nigeria regulates the import quality standards of food and pharmaceutical products in the country.
  5. BUREAU VERITAS QUALITY INSPECTION [BVQI]

Bureau Veritas, operational since 1828, is an international certification and inspection agency. It is functional globally to improve quality and productivity and verify that the products are in compliance with the set standards. BVQI has its headquarters in Paris and France.

It is the responsibility of the buyer that seeks BVQI services that the products supplied to them meet all required parameters.
Thus, the buyer must attach the BVQI inspection certificate to the shipping documents.

The Indian BVQI began functioning in 1971 and is responsible for testing, inspection and certification services to ensure that the quality of the products complies with the international standards.

  1. SOCIETE GENERALE DE SURVEILLANCE [SGS SA]

SGS SA is an international company with its headquarters at Geneva, Switzerland providing inspection, verification, testing and certification services. It ensures that the products meet the required and relevant regulatory international requirements. It also checks the condition and weight of imported /exported goods at trans-shipment. SGS tests the quality, safety, and performance of the products in terms of health and safety standards

Thus, SGS certifies that the products or systems comply with the national or international standards and regulations or the standards required by the importer.

  1. TECHNISCHER UBERWACHUNGSVEREIN / TECHNICAL INSPECTION ASSOCIATION [TUV RHEINLAND]

TUV Rheinland AG is an organization with headquarters in Cologne, Germany, providing technical test service and certification. It has offices in several other countries such as Europe, Asia, America, and Africa. TUV certifies that the safety standards and the quality of products, management systems, manufacturing processes, and personnel meet the required parameters. Also, it ensures that they are in compliance with the international standards.

Quality regulations in Japan

Food products, milk, and milk products, food additives are regulated in Japan under the Food Sanitation Act and relevant legislation. Japan is very strict with the permissible amount of pesticide present in the food imported into the country. Foods, which have a higher level of pesticide, veterinary drug than the regulatory maximum residue limit as defined under the said legislation are not allowed to be sold in Japan.

Certification requirements in the Middle East countries

Middle Eastern countries, i.e., Saudi Arabia, Iraq, Kurdistan, Lebanon, Kuwait, Qatar and/or Syria function on stringent mandatory Conformity Assessment Programmes. It is to ensure that inferior quality or unsafe goods do enter their market from other countries.

All shipments have to comply with product conformity documentation, which includes safety test reports and technical data sheets. For electrical equipment sold in the Gulf region, it is essential that products comply with the technical requirement laid down by the Gulf Standards Organization (GSO). It is vital that products successfully cross the Gulf conformity marking, i.e., G Marking.

Sanitary and phytosanitary requirements in countries

The export country must comply with certain international standards. This is to ensure that the produced food is safe for consumption and adheres to strict health and safety regulations.

In the last decade, international sanitary and phytosanitary requirements of countries have become very strict and inflexible. Importing countries deny consignments that have not complied with their laid down food requirements.

Sanitary requirements refer to minimum pesticide residues, metals, and other contaminants to be present in the export food. Therefore, it emphasizes that the export food products are entirely safe for consumption without any harmful effects.

In the same manner when a country imports plants or plant products, fruits and vegetables, cut flowers and branches, grain or any other regulated articles from another country, they mandatorily require a certificate along with the consignment, which is termed as a phytosanitary certificate.

The phytosanitary certificate is an official document. It declares that consignment being sent to the importing country is in complete accordance with the specified phytosanitary import requirements and with the requirements of the National Plant Protection Organisation (NPPO) of the importing country.

World Trade Organization (WHO) provided an international framework by entering into SPS Agreement. Therefore, the SPS Agreement ensures that the health, hygiene standards or regulations that are met with by the countries to avoid the spread of animal and plant diseases.

Codex Alimentarius Commission (CAC) of the Food and Agriculture Organization (F.A.O.) and World Health Organization (W.H.O.) adopts these standards.

An EndNote

Thus, India, as an exporting country, understands the importance of quality standards set for different commodities among fresh fruits and vegetables and other products and has incorporated measures to meet the various features and required parameters pertaining to Indian products for improving the quality of produce for exports.

 

Is it better to be a merchant exporter than a manufacturer/producer exporter?

It has always been on-going speculation whether it is the manufacturer exporters that hold an advantageous edge over the merchant exporters or is it the other way around. Manufacturer exporters have always been looked upon as the more lucrative option. But recently merchant exporters have almost become parallel to them.

Merchant exporters act as an advantageous recourse because of their high level of competitiveness to propel higher unit realization. It is also their adeptness at upgrading the production quality offered by the manufacturers.

The increasing difficulties in generating foreign exchange earnings have begun to demand compliant export schemes to encourage exports. It is perhaps another reason, which has enforced the governments to increase the involvement of both manufacturer and merchant exporters equally.

The merchant exporters in India contribute almost a third of export revenues, they have been bereft of many incentives received by the manufacturer exporters until now, not being given equal footage. But the concern over the slow growth of exports, even though having crossed the USD 300 billion mark in the year 2017-2018, has induced the government to seriously look upon the merchant exporters as the best boosters in bringing in more export opportunities into the country and has spurred on the extended incentives being especially designed for the merchant exporters including reduction in the cost of credit.

Who are manufacturer exporters?

An entrepreneur who produces finished goods with an intention to sell them to the global markets under his brand is a manufacturer exporter. The manufacturer exporter procures raw materials from the market and processes them to produce finished goods.

Who are merchant exporters?

A merchant exporter, on the other hand, is a person that procures finished goods from a manufacturer and furthers them to the global markets under his label or name. He does not own a factory to produce goods but trades in them.

What is the fundamental difference between the two?
An indisputable advantage that manufacturer exporters experience over merchant exporters is that they do not require the services of any intermediaries for exporting, inadvertently keeping their prices at bay. Since they manufacture the products, they can easily incorporate any changes defined by the importer.

Merchant exporters, on the other hand, do not own a processing facility of their own and have to depend on the manufacturers to purchase goods from. They can procure goods from several manufacturers, and export them at their own risk thus entering into two agreements, i.e., one with the manufacturer to procure goods and the other with an importer to sell goods.

Is merchant exporting more advantageous?

Though manufacturer exporters and merchant exporters receive equal export benefits from the government yet, they differ from each other in terms of how they conduct their business. There are several areas where merchant exporting seems to have the edge over manufacturer exporting. Though there is a multitude of limiting factors involved in it too, on the other hand.

Cons of being a merchant exporter

Cost competitiveness

Manufacturer exporters produce the goods hence they serve importers with a better deal in terms of price. When they quote their prices, it is with an added profit margin. It may have variations depending on the buyers, the volume to supply and the consistency of the order from the same buyer. They need not add any middlemen expenses as they can directly deal with the importer.

The merchant exporters are specialist traders and though they have an infrastructure to serve importers with the best quality products and flexible deals they fail to present as low prices as the manufacturer exporters.

The reason for this being that a merchant exporter is another buyer for the manufacturer exporter. When goods by a merchant exporter are purchased, they already have an added profit margin. The merchant exporter further adds his profit ratio too. Thus, when the merchant exporter quotes the prices to the importers, they are higher than the prices offered by the manufacturer exporter.

Dependence on suppliers for goods 

Manufacturer exporters have a production and processing infrastructure to manufacture the goods; hence they do not have to depend on the suppliers for the products to enter into any export-import agreement.

Merchant exporters, on the other end, are traders and they cannot move ahead with an export order without complete cooperation of the manufacturer. They need to complete a number of extra formalities, which involves two-way paperwork.

Reliability

Merchant exporters rely on the manufacturer in terms of timely delivery as well as meeting the quality parameters meticulously. Though the network of merchant exporters is well structured and they meet all international norms astutely, the reliability on a merchant exporter is indirectly dependent on the quality of the products, which he has to procure from the producers. Any discrepancy in the quality directly affects the credibility of the merchant exporter.

Pros of being a merchant exporter

Lower manufacturing risk

Manufacturing goods require a well-laid infrastructural facility in the form of a processing unit, which in turn involves massive finances. Merchant exporters are traders who involve their finances to further the already produced goods to the overseas market. Thus, they do not have to face overwhelming manufacturing risks. They have the freedom to select the finished products they require and sell it at a profit.

Easily available finance

Merchant exporters are just like other ordinary exporters. With a well-documented export order in their hands, they can access easy finance. It could be either through government or private financial institution or banks. They provide pre-shipment finance to the manufacturers to instigate them to produce products without fear of loss or obsolete stock. The cost of credit presently is low to facilitate the merchant exporters to bring in more export revenues.

Easy diversification

Merchant exporters are just like any other exporters in a country and enjoy all benefits that manufacturer exporters do. They are experts in their strategies and have a strong network through which they adeptly deal with overseas buyers and multiple products.

Flexibility

Merchant exporters buy products from several buyers according to the market pulse. Later they repackage it to sell it under their own brand and name. Thus, they have a wider range of products catering to different qualities than a manufacturer exporter.
Their operational field is more flexible than a manufacturer exporter. Having many products of different quality and price range, they can easily promote goods that fetch better returns in the foreign market and pull away products that are not bringing in profits for them.

Benefits under GST

The merchant exporter prior to the imposition of GST received a special tax benefit. They could procure goods without any duty payment. But with effect from 23.10.17, there have been four IGST tax slabs in function, i.e. 5%, 12%, 18%, and 28%. Precious metals fall under a special category of 3% for inter-state supply.

The merchant exporters are eligible for special concessions on GST. It is under the deemed condition that they export the goods within ninety days of procuring them with effect from the date of the tax invoice of purchase. They have to submit a well-endorsed export order to avail the incentives offered by the government.

Financial benefits

Merchant exporters have to pay GST to procure goods from the manufacturer. When they export the goods to another country, they become legible to ITC allowance, i.e., input tax credit. If the merchant exporters further the goods under bond or LUT [letter of undertaking] they become legible to receive a refund on ITC only under the condition that they have received a remittance of rupees one crore or 10% of export turnover, whichever is higher, in the previous financial year. When merchant exporters export goods after paying IGST, they can claim their refund of IGST.

An EndNote

Manufacturer exporters and merchant exporters, both, are essential to steer exports turnover in a country. They are almost synonymous with each other in terms of benefits and incentives received from the Ministry of Commerce. Though, they do differ in their area of operation with merchant exporters being contributory in bringing more exports to the country by boosting the small manufacturers or MSME.

 

How to choose the best mode of transport in the import-export trade

Transportation mode is an integral part of international trade, and it’s planning. It is essential that cargo to be transported through international boundaries in an import-export transaction is cost effective as well as methodical. The transportation of goods usually occurs by the four modes of transport when it comes to international trade, i.e., rail, road, air, and sea.

The most optimal mode of transport for an export-import operation depends on a multitude of factors such as the size, weight, value and type of goods to be transported, the country of destination and laws pertaining in it, the time period within which the goods should reach the destination and any other special requirements involving transportation of sensitive items. Once decided upon, the importer or the exporter themselves can handle the logistics or carried through with the help of a freight forwarder.

Different modes of transport

The different modes of transportation in the import-export trade are the ocean, air, and land. Each mode of transport has its drawbacks and its benefits, and it is completely on the discretion of the parties involved to select the mode, which helps to maintain a balance between cost, time, and service. Often more than one mode of transport, i.e., multimodal transport is used to deliver the consignment to its destination hub finally.

Road transport

When the consignment is carried through a network of roads to reach the destination, it is considered to be a part of road transport. Thus, goods can be transported by road transport through borders with lesser custom documentation. It does have limited reachability in terms of size and weight carrying capacity. Other factors, which cause problems in road transit are the traffic on roads, the poor conditions of the roads and the weather disturbances.

Benefits of road transport
• Cost-effective
• Doorstep delivery
• Flexible
• Also, easily traceable

Rail transport

Goods to be carried through medium to long distances can be transported through the rail. They are optimal to carry large quantities of goods that are bulky such as cement, coal, fertilizers, iron ore, etc. They involve a lesser time period than shipping cargoes through ocean route.

Key advantages of rail transport include:

  • Safe and reliable
  • Dependable transit time
  • Also, ideal for carrying large volumes and heavy consignment of goods
  • Can cover long distances
  • Well within time deliveries at economical cost

A few rail-road transportation companies around the world are:

  • CSX
  • Norfolk Southern
  • Union Pacific Corporation
  • Canadian National Railway
  • DB Cargo
  • DB Schenker
  • CONCOR

Ocean transport

The oldest mode of transporting cargoes from one country to another, they are rated to be the least expensive mode of transportation. They are considered ideal to carry large volumes of consignments over long distances but the transit time is much longer than any other mode of transport. Whereas a cargo transited by air may take up to 3-7 days, shipped through ocean route it may be get delivered in 1 to 50 days.

Sea transport accounts for almost 90% of the global trade and is used to carry commodities in bulk such as agricultural commodities, iron ore, petroleum, crude oil, engines or propellers, minerals, metals, etc.
It operates through a limited network of sea routes and once the consignment reaches the last port, goods are further transported to the destination through land transport. Sea transport does face limitations in the form of unforeseen perils owing to natural environmental disturbances, which are more or less covered under cargo insurance.

Appraisal of the beneficial aspects of ocean transportation:

  • Multifarious options in carriers
  • Extensive network around the world
  • Most reasonably priced mode of transport
  • Ideal for almost any range of products in large volumes
  • Also, optimal for products with long lead time

Some biggest shipping companies in the world:

A.P. Moller –Maersk Group
Mediterranean Shipping Company
CMA CGM S.A.
COSCO Shipping Corporation Ltd.
Hapag-Lloyd
Evergreen Marine Corporation
OOCL
Yang Ming Marine Transport Corporation
MOL [Mitsui O.S.K. Lines Ltd.]
NYK Line [Nippon Yusen Kabushiki Kaisha]

Air transport

It is the newest mode of transportation to be introduced in the international trade, and it has been forecasted that the world air transport should rise 4.2% per year, owing to a growth in the world’s GDP in the next fifteen years.
Air Transport is the safest and the quickest mode of transport, ideal for goods that need to be delivered within a short span of time. It is extensively used by the retail industry to fulfill the inventory gap, as and when required.

They are an expensive mode of transport involving airport taxes and high airfares yet are being used by a large number of exporters and importers for goods that are most safe when transited through the air such as fragile items or perishable items involving food, flowers, and pharmaceutical items.

Air transport does witness limitations in the way of being one of the most costly means, and not ideal for large-sized goods and heavyweight products. Once the goods reach the destination airport, another mode of transport take it to its final place of delivery.

Pivotal benefits of air transportation:

  • Speediest mode of transit
  • On time arrivals and departures
  • Safe and ensured cargo delivery
  • Also, involvement of lesser documentation and formalities in comparison to other modes

Some top-notch airfreight companies:

  • FedEx Express
  • UPS Airlines
  • DHL Express Group
  • Emirates Skycargo
  • Cathay Group
  • Qatar Airways
  • Lufthansa Group
  • Air France- KLM
  • Korean Air
  • Cargolux Group
  • ABX Air
  • AeroLogic

Multimodal transport

Multimodal transport is a balanced and effective combination of more than one means of transportation to ensure the doorstep delivery of the consignment. It can be a combination of rail-road transport or sea-air modes to enable the importers and exporters quick, reliable and cost-effective transit of goods.

Indispensable benefits of multimodal transport:

  • By using a combination of modes of transport goods will reach right to the hands of the importer.
  • One document can handle all transport means
  • Also, hassle-free delivery and timely delivery

Factors affecting the choice of mode of transport

There are various modes of transporting goods in international trade thus one can select can only after working on the requirements related to the size, weight, transit time involved and transportation cost of the mode.

Cost

Transportation cost depends on the size and volume of the cargo other than the distance factor. To transport large volumes of cargo over a long distance at cost effective prices, sea transport is the most appropriate mode. Air transport is best for light and quick delivery of products.

Reliability and safety

A critical factor in deciding the mode of transport is the reliability and regularity in their transit. Each mode of transport experiences certain setbacks in its course. Thus a buyer must make himself completely aware before taking a decision on the model that would be the most appropriate.

Protection of goods from damage, loss, and theft owing to man-made or natural occurring incidents or happenings can be insured by cargo insurance against damage and loss during the transit time by air, land or ocean. There are various types of cargo insurance that buyers consider to safeguard themselves from any unforeseen loss.
Sea transport covers 90% of the global trade. The shipment can either be transported through free on board [FOB] or by cost insurance and freight [CIF] as considered beneficial by the importer and exporter thus making a considerable difference to the appropriation of the type of mode to be undertaken.

Type of goods

This is one of the most vital considerations that a company must work on before determining the mode of transport in an import-export. Goods can be general, fragile, perishable, dangerous or sensitive. Thus, it is essential to consider the transport, which after complete information appears to be most optimal for the type of goods. It also depends on the norms one must comply with.
Sea transport is ideal for heavy and bulky goods in large volumes. On the other hand, air transport should be one’s mode of transport for perishable and fragile goods. Dangerous items such as transportation of animals have to undergo several formalities and rail transport can be the best option in such case.

An EndNote

Thus, there are numerous ways of transporting goods in international trade.  It is only after working on the priorities, the pros, and cons of each mode and several other factors that one can choose the most efficient and effective means of shipment.

 

How to Export Pharmaceutical Products?

 

Growing significantly over the years, it was between 1980 and 1990 that Indian pharmaceutical industry stepped into exports. Pharmaceutical exports stood at $ 17.27 billion for the year 2017 -2018 in comparison to $16.80 billion in the year 2016-2017. It shows a remarkable rise with a further expected growth of 30% to reach almost $20billion by the year 2020.

Why are Exports of Pharmaceutical Products from India a lucrative option?
➢ India is volume exporter in API (Active pharmaceutical ingredients) to treat acute or chronic diseases.
➢When it comes to production, India stands on the sixth position among the countries of the world and exports Indian vaccines to more than 150 countries.
➢ Several international NGOs like the UNCTAD, the Clinton Foundation, Bill & Melinda Gates Foundation, etc. look up to Indian pharmaceutical products to meet 70% of the medicine requirement of the developing countries.
➢ India has more than 3000 pharmacy companies and nearly 10,500 manufacturing units presently out of which WHO GMP has approved 1400 units.
➢ Manufacturing costs of pharmaceutical products in India are 35-40% less than the US.
➢ India is among the top countries to export generic formulations.
➢ 584 sites in India are approved by the USFDA (United States Food & Drug Administration).


Procedure for Export of Pharmaceutical Products from India

Export of pharmaceutical products is one of the most thriving options (over the edge concessions and facilities extended by the government) though it may be a bit difficult, as it involves stringent processes and documentation.
Pharmaceutical manufacturers who have an interest in exporting products from India must comply with all the norms as per ‘The Pharmaceutical Export Promotion Council (PHARMEXCIL)’. The introduction of PHARMEXCIL was by the Ministry of Commerce and the Government of India in 2004. The aim was to promote exports related to the pharmaceutical industry as a separate wing.


How to initiate the export process for pharmaceutical products?

To initiate exports of pharmaceutical products to another country, it is essential to carry out the following:

  • Register as an exporter and obtain an IEC number. Once an applicant submits all the important documents and completes all the necessary norms, he shall receive an IEC number. Once the application has approval, one is permissible to export pharmaceutical products from India.
  • Register an office in the importing country.
    • Register the pharmaceutical product in the importing country.
    • Complete the necessary details pertaining to shipping, payment, and delivery.
    • On receiving a purchase order, complete the domestic formalities and have the products sent for customs clearance. Customs clearance is a mandatory document without which products export from the country is not possible. (Applicable to all export products).
    • After customs clearance, ship the products and wait for the customs clearance in the importing country.


Mandatory Requirements for Exporting Pharmaceutical Products from India

It is vital that with each consignment to be exported, the exporter mentions the name of the drug, the dosage form, the composition, the date of manufacturing and expiry, and the quantity along with the name of the country the products are to be exported to. The authorized signatory should duly sign it.

The exporter must submit the purchase order with clear indications. Thus, it must show the name of the drug, the dosage form, the composition, the date of manufacturing and expiry. Also, it must include the quantity and name of the country (import). The authorized signatory must duly sign it. It should not be more than six months old than the application submitted by the exporter.

The exporter has to be precise in the labeling and packing of the pharmaceutical products. It will evade rejection both on the domestic front and the country importing it.

Each importing country has its norms and specifications related to the quality of imported pharmaceutical products. It is crucial that the exporter complies with the mandatory requirements laid down by the importing country.

If the targeted country of export is the USA, the exporter has to attain approval by the USFDA. Also, in the case of European countries, the exporter has to act in accordance with the specifications laid down under EMA requirements.