Small- and medium-sized enterprises (SMEs) involved in exporting should consider factoring if importers balk at the prospect of bearing costs associated with letters of credit (L/Cs).

This was the suggestion of HSBC India's head of commercial banking, Puneet Chaddha, who was talking about the prospects for small Indian businesses competing in the global marketplace.

Costly L/Cs

Chaddha says he is seeing a "visible trend" in international trade away from L/Cs towards open account.

"The importer is not willing to bear the cost of the L/C which is demanded by the Indian exporter," Chaddha says. "This might even be the case with an established relationship developed over years," he adds.

Case for factoring

Rather than an Indian SME going ahead with a more risky open account transaction, Chaddha suggests they consider factoring services, which provide finance against export invoices.

Factoring he argues provides finance that meets the SMEs' working capital needs.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.