A Fresh Start and Ambitious Goals!

India's merchandise exports reached a record high of over USD 447 billion in the previous fiscal year, up from USD 442 billion in FY22-23. Despite a single-digit growth rate of around 6%, this leap was remarkable in the face of global uncertainty and the Red Sea crisis.

Looking Forward: The $2 Trillion Export Vision

India now sets its sights on an ambitious goal: reaching $2 trillion in exports by 2030 and I'd like to wish all of our exporters a successful year ahead in growing their exports. However, achieving this target will require collaborated efforts across all key stakeholders that addresses all aspects of trade.

Here's my bit in contributing to this goal - a weekly piece starting today covering a variety of aspects and challenges of trade, including trade finance. I hope this will help the trade community, particularly exporters, to compete effectively in global markets and win more export orders.

Let’s discuss today the choice of payment methods available to exporters while negotiating new orders. There are essentially 3 payment options as below:

1· Advance payment

2· Open account

3· Traditional bank-facilitated payments (Documentary collection and Documentary credits)

While each payment option has its place in the best-fitting trade scenarios, open account trades are becoming more and more popular.

Today over 80% of global trade occurs in the open account space where the buyer pays the seller after the goods have arrived (typically 30-90 days later).

Open account trade helps to increase competitiveness in export markets and buyers often push for sellers to trade on open account terms. However, exporters need to take well informed decisions when negotiating and agreeing on open account terms with buyers. Here are some tips that exporters may consider:

Tip1

Exporters should investigate their buyers' references and credit histories. Background checks and any abuses that have previously been reported should be included in this, particularly in the case of large retailers who are sometimes known to underpay or postpone payments. Some of the basic details of small to medium sized buyers can be found in public domain however it is recommended to also take opinion from third party credit agencies.

Tip 2:

Exporters should explore the possibility of discounting their export invoices to fund their working capital while waiting for the payment. Lots of non-bank finance providers have developed over the years in the area of international trade finance which includes trade finance and factoring houses who are prepared to offer exporters or importers bundled service package consisting of finance as well as credit protection.

Tip3:

Exporters not looking for finance should consider solutions such as export credit insurance or government guarantees, to limit the risk of commercial losses caused by a buyer's delinquency, insolvency, or bankruptcy.

Tip4:

Exporters should clearly specify in their sales agreements and conditions of credit the circumstances under which their buyers may or may not withhold payment. Also, exporters need to ensure that they are well aware of the payment policies of their buyers, for example, large buyers usually have a fixed payment cycle of once a week or fortnight.

Tip5:

Exporters should consider all possible scenarios and plan accordingly. For example, when offering payment terms of 90 days from shipment exporter must ensure that financing is available not only for this period, but also for a few additional months in the event of delays especially in the current red sea crisis where shipments are taking longer time to reach their destinations. Most of the financing companies restrict financing period upto 120 days from shipment.

Follow me or feel free to reach out to me if you would like to know more such tips. Next week I will talk about some tips when negotiating other payment options. Meanwhile, happy exporting!