New international markets are opening up to local sellers who can offer the right products to match the global demand. Global supply chains are becoming systematically interlinked, and businesses are digitising their production as well as distribution. This has significantly increased the ease of doing business overseas and motivated many domestic manufacturers to export their products to foreign markets.
While exporting is not a new concept, for a new business owner, becoming an exporter could be daunting. Even though several government initiatives support MSME export, the perceived complexity of the process keeps many businesses limited to the domestic market. In this article, we will discuss how MSMEs can become exporters, the pre-requisites, and the considerations for becoming a successful exporter.
Who Can Become an Exporter?
Exporters can explore new markets, grow their net profitability, and improve product quality when they start exporting. Under the Foreign Trade Policy (FTP), any person or registered business entity can become an exporter, provided they satisfy the given pre-requisites defined by the government. For MSMEs, these requirements include:
- A registered business: MSMEs registered as sole proprietorship, partnership business, limited liability company, or company are eligible to export.
- A business bank account: Although every MSME already has a linked business account for export purposes, it is best to have a current account with a bank authorised to deal with foreign exchange.
- A linked PAN: The MSME owner's PAN (Permanent Account Number) must be linked to the business before starting exporting.
- An Import Export Code (IEC) Number: An IEC is a unique, 10-digit, alpha-numeric code that is issued on the basis of MSME’s PAN number. As per the FTP, it is mandatory to have an IEC number for conducting any import/export business.
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Process to Become an MSME Exporter
Today, 34% of the national exports are done by MSMEs. This is indicative of the fact that many MSME business owners have realised the incredible benefits of exporting. With the prerequisites mentioned above, you can also start on your exporting journey. However, if you don’t have the IEC yet, you can obtain it as the first step to becoming an exporter.
- Obtaining an IEC: To obtain an IEC, you need to file an online application at www.dgft.gov.in and pay a fee of Rs. 500. Along with your application, you have to submit a valid digital signature token (Class II or III), copies of your PAN card and Aadhar card, your mobile number, email ID, address and bank account details.
- Selecting Products for Exporting: While your IEC application is getting processed, you need to select the product(s) that you plan to start exporting. For MSMEs with multiple product lines, this means carefully analysing each product and its export potential. You also need to ensure that your selected products are freely exportable and not covered in prohibited or restricted lists.
- Selecting Target Market(s): Next, you need to select your products' most viable target market. You can research multiple countries and compare them in terms of market size, competition, product quality requirements, payment terms, and special export benefits. Export promotion councils (EPCs) and Indian Missions abroad can help in gathering the required information.
- Finding Buyers: You need to start participating in trade fairs, buyer-seller meets, and exhibitions to find potential buyers. B2B portals, EPCs, Indian Missions abroad, and overseas Chambers of Commerce can also help you.
- Website and Sampling: To attract importers to your business, you can also set up a multilingual website and geo-target it to countries where you wish to export. In addition, you can invest in providing customised samples to prospective customers for getting export orders. This is allowed without any limit for freely exportable items under the FTP 2015-2020.
- Setting the Right Price: To export profitably and grow your customer base, your price should be competitive yet give you the best possible profit margin. Prepare an export costing sheet for all the products to be exported and then work out the pricing. Take into consideration necessary expenses like sampling, cost of production, insurance and freight (CIF), Cost and Freight (C&F), and Free on Board (FOD) terms.
Key Considerations for MSMEs to Export Successfully
In addition to following the above process, you must ensure that your MSME business is protected. The following considerations are, therefore, important:
- Negotiating the Terms: Even if you are new to exporting, you are well within your rights to negotiate the terms of trade. Evaluate every buyer in terms of buying ability and prospects. You can also demand Letters of Credit (LOC) or advance payment while booking an order.
- Covering Your Risk Through ECGC: If a buyer can provide neither LOC nor advance payment, you can protect your interest by covering the risk of payment default through ECGC (Export Credit Guarantee Corporation Limited). The ECGC provides a credit limit on the foreign buyer and protects your financial interests in case of contingencies.
Furthermore, you must also explore various initiatives started by the Government of India to promote MSME export. These include IGST refund, tax-free export under LUT bond, and concessional rates for merchant exporters. The government also offers ‘Status Holder Certificates’ star ratings and quality awards for exporters, which can elevate your brand profile. There are also interest equalisation schemes, transport and marketing assistance, market exploration support, and production-linked incentives for MSME exporters.
In conclusion, exporting may be a vast concept and can take a lot of preparation. But with a structured approach and careful consideration of all internal and external factors, MSMEs can successfully become exporters. In addition to various export-promoting initiatives by the government, banking and financial institutions also provide financial assistance to aspiring exporters.
While banks can provide loans against LOCs, financial service providers like Kinara Capital offer specialised working capital loans to MSMEs for fulfilling export orders. MSMEs can also avail loans for purchasing assets from Kinara Capital to expand their production capacities and meet the growing export demand. So, all you need to do is get started on your exporting journey.
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