What is the need for funding in export
shipment?
Typically, major export orders are not executed because of the payment terms or lack of the financial capacity of export firms to take bigger orders.
Hence, investors are needed to fund pre-shipment procurement of goods from farmers or or FPOs or major wholesalers to control costs, conduct testing, and then load it on the shipping vessel or air cargo.
Since, the business is conducted largely through Letters of Credit (LC), the transactions are safe and insured by the government-backed ECGC as and when required along with insurance.
Why should investors be interested in such a
proposal?
The investors in startups typically stay invested for months or years before they ever find a return on investment. So their funds are locked up for a long time before they see any profits, if any, or if they exit from the venture.
So, by advancing or financing capital to export firms who have experience and expertise in the export trade, investors can either have a share in the export profits on a per transaction basis or they could get loan out to funds to the firms as and when export orders through LC are received.
How can investors be sure if their funds are
safe?
There are a few ways that can help investors alleviate the risk for funding export orders: –
- If capital is advanced on a credit/loan basis, we can have postdated checks and a simple agreement stating the repayment.
- If capital is provided on a profit-sharing basis, then funds can be transferred directly to the account of the suppliers as chosen and vetted by the investor and the firm alike.
Furthermore, a contract couple also be drafted to ensure the when the realisation of earnings or profits will be transferred to the investors’ account as and when it happens.
In the extreme case scenario, property documents of the owner’s family be kept with the investors until they receive their full payment—profit or interest plus original capital.
Thus, contracts, post-dated cheques, and property documents will help allay any risks or fears of the investors.
Do the investors need to transfer the funds
to the export firms’ bank account?
No.
In fact, the export firm never wants funds to be transferred in their bank accounts.
The exporter insists that the investors directly transfer the funds to the farmer, FPOs, or the warehouse as and when the need arises.
What does the export firm expect from the
investors?
The export firm expects that the investors will readily make available the funds as and when the needs arises. For this, the exporter will submit a copy of the LC and the export order to the investor before procurement of the raw materials for shipment.
What if the investors do not have any
readily available funds or are facing
liquidity issues?
To preempt this, the export firm will have 4-7 investors on board as and when the export finance is required so that the firm doesn’t default in its obligations to the buyer and prevent denting the image and reputation of the firm in the international markets.
Why should the investors trust a new firm
with no sales and experience?
Very true, and agreed, this will be a point of contention in the minds of the investors.
What has to be borne in mind is that the partners in the firm have consultants who are already clocking sales of more than a few hundred tons of animal feed and other agricultural produce to various countries around the world.
Furthermore, the strategic tie-up with consultants from time to time to get practical knowledge will be leveraged to the full effect, as it’s a win-win proposition for both the firm and the consultants, just like the firm would have a profit-sharing-basis tie-up with investors.
Why should the investors not lend money in
the open market instead of investing in an
export firm?
Seems logical enough. However, the market yields a 2% monthly interest on the principal amount; whereas, on the other hand, an export firm in the agricultural sector has a profit margin of 3% to 5% for commodities and up to 20%-30% for finished and packaged products. And the export cycle for one shipment takes from 15 to 30 days for commodities like turmeric, moringa, cumin seeds, red chili, etc.
Profit margins for agricultural exports from India typically range from 10% to 50%, with lower margins (8-15%) on bulk commodities and higher margins (20-50%) for processed foods, organic products, and spices. Key high-margin exports include spices (25-40%), organic products (50-100% premium), and niche food products.
Key Profit Margin Drivers & Details:
- Processed Food/Specialty Products: 20% to 40%.
- Spices/Organic Products: 25% to 50%.
- Bulk Commodities (Rice, Wheat, Corn): 8% to 15%.
- Private Label/Value-Added: 30% to 45%.
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For example, a Rs. 10 lakh investment for a month in the export firm will yield Rs. 20,000 profit at a 2% margin, which is equivalent to the monthly interest rate when lent in the market privately by the investors. In such a scenario, the the firm will not take its profit from the deal as it would not be profitable to the investors.
What’s the future scope of business?
The immediate future scope would be to put in place a sales and marketing team to ramp up the sales gradually while also increasing the expertise and reach in the operations and the procurement side of the business. The business also intends to share profits with the sales and operation/procurement employees or consultants so that the firm in the initial stages does not accrue upfront costs of retaining employees on record.
The firm in the medium- to long-term future envisions establishing processing units, cold chain logistics, and warehouses in the future to better capture the value across the supply chain and earn more profits.
Will the investor have any equity in the firm
in the near future, or will the firm continue
to operate on a profit-sharing basis arising
out of working capital finance?
The firm prefers to stay private at all times with only strategic investments at various phases in the growth of the firm. However, investors would be needed as and when expansion of sales operations takes place so as to not lose on export orders of huge consignment (typically 15-30 containers in a month for a single agricultural commodity)