Based on the stage at which the funding is provided, export finance is divided into pre-shipment and post-shipment finance. As their name suggests, pre-shipment finance is the credit advanced to the exporters before the shipment of goods, whereas post-shipment finance refers to the credit extended when the goods are already shipped.
What is Trade finance?
Trade finance refers to financing for the purpose of trade, which includes both domestic as well as international trade. Trade transaction is often financed by financial intermediaries like banks, in the form of Letter of Credit, Insurance, Export Order, etc.
A trader, i.e. exporter looks forward to an importer, to prepay for the goods traded, the importer wants to mitigate the risk, and for that he/she demands the exporter to document the goods shipped. In this way, banks/financial institutions may provide support in the form of Letter of Credit, Insurance, etc.
Content: Preshipment Vs Post Shipment Finance
|Basis for Comparison||Pre-Shipment Finance||Post-Shipment Finance|
|Meaning||Pre-shipment finance is a facility of extending working capital finance, to the exporter of the goods, in order to export them in another country.||Post shipment finance is a form of the loan extended by the bank to the exporter against the shipment of goods which is already done.|
|Objective||To help the exporters to procure raw material, labour, supplies, so as to produce, package, store and transport the goods.||To finance export receivables right from the date documents are submitted to the exporter's bank till the date of realization of proceeds from exported goods.|
|Eligibility||Export company or company exporting goods through export houses.||Exporter himself or the person in whose name export documents are transferred.|
|Source of Repayment||Proceeds from the contract||Proceeds from exports|
|Risk involved||Payment and performance risk||Payment risk only|
Definition of Pre-shipment Finance
Pre-shipment finance is the financial aid provided to the exporter from the date of receiving the export order till the date of actual shipment of goods. It can be fund-based or non-fund based finance.
The main purpose of extending pre-shipment finance is to fulfil the working capital needs of the exporter/seller of the goods such as the acquisition of raw material, labour, packaging material etc., processing or conversion into final goods, packaging, warehousing, transportation or shipping and other pre-shipment expenses, on the products which are meant to be exported overseas.
For this purpose, a purchase order from a recognized buyer/documentary evidence such as a letter of credit or guarantee is issued on the buyer’s behalf and in favour of the exporter.
Classification of Pre-Shipment Finance
Pre-Shipment Finance can be of three types:
- Packing Credit
- Advance against incentives receivables from the Central Government, which is covered by ECGC guarantee.
- Advance against cheques received as advance payment.
Definition of Post Shipment Finance
Post Shipment Finance can be defined as any form of load, advance or credit offered to the exporter by a financial institution, after the shipment of goods. It must be noted that the date of providing financial assistance, after the shipment of goods to the realization of proceeds from the exported goods.
Post Shipment Finance is granted to only those exporters, in whose name goods were exported or in whose name the documents concerning the export are transferred. Moreover, finance is extended for short term or long term, which relies on the nature of export. The finance is given against the shipping document which acts as proof that the goods are being shipped.
Post shipment finance is helpful in utilizing the working capital in an optimum manner.
Classification of Post Shipment Finance
Post-Shipment Finance can be of three types:
- Export bills purchased, discounted or negotiated.
- Advance against duty drawback receivable from the government.
- Advance against bills sent for collection
Why Post-Shipment Finance is required?
We all are aware of the fact that there is some sort of time gap between the shipment of goods and the realization of proceeds and that is why post-shipment finance is required. The time gap is mainly due to:
- Preparation of a set of documents
- Submission of the documents to the exporter’s bank while requesting for payment of export proceeds from the buyer.
- After this, the documents are then forwarded by the exporter’s bank to the buyer’s bank.
- Followed by the remittance from the buyer’s bank to the exporter’s bank for extending credit to the exporter.
Key Differences Between Pre-shipment and Post-shipment Finance
The points given below are substantial so far as the difference between pre-shipment and post-shipment finance is concerned:
- Pre-shipment finance is a facility provided to the exporters for fulfilling their purchase, processing and packaging needs before the goods are actually shipped. On the contrary, Post-shipment finance is a loan/advance facility which meets the cash or liquidity requirements of the exporters for the time lag between the goods are shipped and payment is received.
- The primary objective of pre-shipment finance is to provide sufficient finance to assist the exporters in procuring raw material, labour, supplies, so as to produce, package, store and transport the goods. Contrastingly, the main objective of post-shipment finance is to finance export receivables starting from the date of submission of documents to the exporter’s bank till the date of realization of proceeds from exported goods.
- For availing pre-shipment finance, the following persons are eligible – export company possessing export order or LoC in its favour, a company which does not possess export order or LoC, but the exporting goods through merchant exporters or export houses. Conversely, Post-shipment finance is granted to the exporter, when the goods are shipped by him or to the person in whose name documents concerning the export is transferred.
- When it comes to the source of repayment, the proceeds from the contract is the source in case of pre-shipment finance, whereas proceeds from the export are the source in case of post-shipment finance.
- Pre-shipment finance involves both payment and performance risk, while post-shipment finance encompasses payment risk only.
- Talking about the quantum of finance, in case of pre-shipment finance, no specific formula is there to ascertain the quantum of finance, to be extended to an exporter. On the contrary, upto 100% of the invoice value of goods exported can be granted as post-shipment finance.
Pre-shipment finance is extended to the exporter for a short term, as it is working capital finance. On the other hand, post-shipment finance is extended for the short-term or long term, depending on the nature of the export.