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Pre-shipment & Post-shipment finance

Pre-shipment & Post-shipment finance

To make the financial process of purchase, processing manufacturing or packing of goods more comprehensible during export or import, businesses use export finance – the credit facilities or techniques of payments at the pre-shipment and post-shipment stages.

While export finance is provided exclusively by commercial banks, which are members of the Foreign Exchange Dealers Association, the refinance facilities to the commercial banks in India are issued by the Reserve Bank of India (RBI) and the Industrial Development Bank of India (IDBI). Medium and long term credits are also extended by Export-Import Bank of India (EXIM Bank).

The beneficiaries of the export finance can be the Indian exporters or the deemed exporters from India and also the overseas importers.

Export finance – a part of trade finance – can be categorized into:

Pre-shipment Finance

After the confirmation of an order by the buyer, mostly through a Letter of Credit, exporters often need working capital finance to fund wages, production cost, buying raw materials, processing and converting into finished goods and packaging.. The finance required by an exporter, prior to the shipment of goods, is defined as pre-shipment finance.

The banks grant pre-shipment credits under the concessional rates of interest at 7.5 per cent and it can extend to a maximum period of six months.

Pre-shipment finance is accessible by the exporters through receivable-backed financing, inventory/warehouse financing and pre-payment financing.

A loan provided by a lender with the goods exported essentially considered as security is called the trade or import finance – wherein the lender can seize the goods in case of defaulting. While the funds provided by the lender can go up to 80% of the total value of the goods, factors like the risk of exporting, the goods being exported and the lender plays a major role on the amount of the allocated loan. In case of goods with little demand, lenders often shy off to finance, since there are higher risks – as during commercial losses the goods might not get re- sold.

Inventory or warehouse financing is often preferable since lenders might demand for the exported goods to be kept in a trusted location or public warehouse or borrower’s premises under the control of a third party. It is also favorable for the borrowers for short term working capital or loans, since they can use the inventory as collateral or flexible terms when they have used up existing credit lines of bank overdraft facilities.

Pre-payment financing is the buyer taking out a loan specifically to pay the seller in advance of the shipment of the goods. According to the borrowing contract, the buyer is liable to pay the loan back to the bank soon after receiving payment of the goods. While pre-payment financing ensures quick payment, the risk of losses in such finance is only shared by the buyer and the lender.

Pre-shipment finance is majorly beneficial in:

  • Purchasing of raw materials to manufacture goods
  • Storage of goods in proper warehouse till shipment
  • Payment for packing, marketing and labeling of goods
  • Payment for pre-shipment inspection charges
  • Purchase of heavy machinery and other capital goods from domestic market, for the production of export goods
  • Meeting expenses of processing goods

Post-shipment Finance

After the shipment of goods for meeting working capital requirement, if the financer advances the payment, to gain enough liquidity between shipping the goods and receiving payment, it refers to post-shipment finances. This form of export finance works as a bridge between the date of extending the credits after the shipment of goods to the date of realization of the export proceeds.

The rate of interest of the loan to post-shipment finance is charged at 8.65 per cent and is provided to a maximum period of six months.

Post-shipment finance is majorly beneficial in:

  • Payment of agents/distributors
  • Payment for publicity and advertising in overseas market
  • Payment for post authorities, customs and shipping agents
  • Payment towards Export Credit Guarantee Corporation of India Ltd (ECGC)
  • Payment for overseas visits for market surveys
  • Payment of marine insurance premium, under CIF contract

Supply Chain Finance

Supply chain finance, also known as supplier finance or reverse factoring is a technology-based business and financing procedure, which links various parties in a transaction – such as buyer, seller, financer – for lower cost and better efficiency. To optimize working capital for both the buyer and the seller, supply chain provides short-term credit and works better if the buyer’s credit rating is better than the seller – so that the former can access capital at a lower cost.

In the out turn of globalization and the subsequent increase of competition, efficiency and productivity, supply chains are gradually being lengthened. It also diversifies the risks, as buyers tend to purchase one product from several suppliers. In a solution to benefit both buyers and suppliers, Global supply chain finance (GSCF) enables a cash flow solution that helps businesses free up working capital trapped in global supply chain. Thereby, suppliers get early payments and the buyers get a chance to extend their payment terms.

However, there are certain risks associated with buying goods in bulk and transporting them across international borders; as a result of which many firms and investors baulk at engaging in such transactions, despite knowing that they can be profitable.

Summing-up, export business is exposed to more risks than most other businesses and to reduce the risk factor, Export Credit and Guarantee Corporation (ECGC) has been formed in India to provide assistance in the form of insurance cover and guarantee. The Export Inspection Council of India (EICI) has also been formed to extend financial support to exporters.