Decoding Finance Cost

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    • What is Pre-Shipment credit?

    Pre-shipment credit is a short-term loan provided by banks and financial institutions to enterprises to help fund the acquisition and shipping of products or services for export.

    Pre-shipment Credit in Rupee:

    Exporters can avail credit in rupee before! shipment of goods.

    Pre-shipment Credit in Foreign Currency (PCFC):

    Exporters can also avail credit in foreign currency before shipment of goods

    Export Bills Purchased/Discounted

    Exporters can get their export bills purchased or discounted on a Documents against Acceptance (DA) or Documents against Payment (DP) basis.

    Export Bills Negotiated

    Exporters can get their export bills negotiated under a Letter of Credit (LC).

    Advance against Bills Sent on Collection Basis:

    Exporters can avail advance against bills sent on collection basis.

    Post-Shipment Credit in Rupee:

    Exporters can avail credit in rupee after shipment of goods.

    Post-Shipment Credit in Foreign Currency:

    Exporters can also avail credit in foreign currency after shipment of goods.

    Why it is beneficial?

    Pre-shipment credit improved cash flow by financing goods or services for export, helping financial resource management and mitigating financial risks for businesses.

    Importantly, if pre-shipment credit is in a foreign currency, post-shipment credit must also be in the same curren- cy, offering exporters cost advantages linked to LIBOR/EURIBOR rates.

    Understanding export incentives is important when evaluating funding options for exporters

  • Circular on Interest Equalization Scheme (IES)
  • Role of subvention in export finance
  • HSN Code list where subvention is applicable
  • Definition of MSME

    • Buyer’s Credit

    Buyer's credit is a financing option available to importers in India. It is a short term working capital trade credit loan extended to an importer by an overseas lender such as a bank or financial institution. This facility enables importers to procure loans from overseas financial institutions at lowcost borrowing rates, which are coupled with SOFR rates. It is important for importers to consult with financial experts and adhere to relevant regulations when considering raising debt through buyer's credit. The calculator helps you evaluate the arbitrage available between rupee and foreign currency funding options.

    Supplier’s Credit

    Supplier's credit is a financing option available to importers in India. It is a structure of financing import into India where overseas suppliers or financial institutions outside India provide financing to the importer on LIBOR-linked rates against a usance letter of credit (LC). This facility enables importers to procure loans from overseas financial institutions at lowcost borrowing rates, which are coupled with LIBOR rates⁵. It is important for importers to consult with financial experts and adhere to relevant regulations when considering raising debt through supplier's credit. The calculator helps you evaluate the arbitrage available between rupee and foreign currency funding options.

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    A domestic company can raise debt in foreign currency through the FCNR(B) route despite having no exports or imports. FCNR(B) loans are disbursed and repaid in foreign currency at fixed interest rates, usually lower than domestic rates. However, RBI regulations like the Master Directions on ECBs apply. Companies should consult financial experts and follow relevant guidelines when raising foreign currency debt.

    Unlock Your Company's Global Financial Potential with Foreign Currency Loans with Myforexeye

    When financing a Greenfield project, compare borrowing costs of local versus foreign currency loans. Foreign loans can have lower rates but pose exchange rate risk. Local loans eliminate this risk but could have higher rates. Also examine machinery procurement - localized purchas- es reduce transportation costs, yet imports provide advanced technolo- gy. To select the best finance approach, carefully balance the potential cost savings and risks of all financing and sourcing choices against the project's specific needs.

    Pre-Section Stage Advisory

    Myforexeye helps businesses get good loan terms from lenders, reducing borrowing costs. Carefully examining each cost item assists in finding the best funding option.

    Post-Sanction implementation

    After a project is approved, closely check the sanction letter limits on what loans are allowed. If foreign cur- rency loans can be used, Myforexeye can help get the money and manage risks of interest and currency changes.

    Frequently Asked Questions

    Finance cost is the total cost of borrowing funds for a business or an individual. Finance cost includes both explicit costs, such as interest payments, fees, commissions, etc., and implicit costs, such as opportunity costs, exchange rate losses, etc. Finance costs can be calculated by adding up all the explicit and implicit costs associated with borrowing funds over a given period of time.
    Fund based products are those that involve the actual lending of funds by a bank or a non-banking financial company (NBFC) to a borrower. Examples of fund based products are loans, overdrafts, cash credit, etc. Non-fund based products are those that do not involve the direct lending of funds, but rather the provision of a guarantee, an assurance, or a commitment by the bank or NBFC on behalf of the borrower. Examples of non-fund based products are letters of credit, bank guarantees, standby letters of credit, etc.
    Domestic currency financing is when a borrower obtains funds in the same currency as its home country or its main market. Foreign currency financing is when a borrower obtains funds in a different currency than its home country or its main market.
    Some of the factors to consider when choosing between domestic currency financing and foreign currency financing are:
    - The expected movement of exchange rates: If the borrower expects its home currency to appreciate against the foreign currency, it may benefit from foreign currency financing as it will have to repay less in terms of its home currency. Conversely, if the borrower expects its home currency to depreciate against the foreign currency, it may benefit from domestic currency financing as it will have to repay more in terms of its home currency.
    - The degree of matching between revenues and expenses: If the borrower's revenues are mainly denominated in its home currency, it may prefer domestic currency financing as it will reduce its exposure to exchange rate risk. Conversely, if the borrower's revenues are mainly denominated in a foreign currency, it may prefer foreign currency financing as it will reduce its exposure to exchange rate risk.
    - The availability and cost of hedging instruments: If the borrower can access hedging instruments such as forward contracts, futures contracts, options, or swaps, it may be able to mitigate the exchange rate risk of foreign currency financing. However, hedging instruments also involve costs and risks, such as counterparty risk, liquidity risk, and basis risk. The borrower should compare the net benefit of hedging with the net benefit of choosing domestic currency financing.
    The entire financing needs of any company can be divided between long term loans and working capital loans. The options available for long term loans are –
    A. Domestic currency borrowings – The choice is limited to borrowing long tenor debt in domestic currency. This may be an expensive route for all emerging economy companies where domestic rate of interest are high when compared to foreign currency loans.
    B. Foreign Currency loans – Loans in the form of ECB, Foreign Currency Term Loans and FCNR (B) loans are available to finance long tenor debt.
    The options for financing working capital requirements are as following -
    Exporters – Packing Credit in INR, Foreign Currency, Export LC Discounting, Export Factoring Importers – Cash credit loans, Working Capital Demand Loans (WCDL), Non-Fund based facility involving Letter of Credit, Standby Letter of Credit etc.
     
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