Important Differences Between Pre-Shipment and Post-Shipment Finance

Pre-shipment Finance

Pre-shipment finance refers to the financial assistance provided to an exporter by a financial institution, such as a bank, to meet their working capital needs from the date of receiving an export order until the actual shipment of goods. The purpose of pre-shipment finance is to provide funding for expenses related to the production, processing, packaging, transportation, and other pre-shipment activities of the goods meant to be exported.

The pre-shipment finance is usually provided against a purchase order or a letter of credit issued by the buyer, which serves as security for the loan. The financing can be either fund-based or non-fund-based, depending on the needs and requirements of the exporter.

Pre-shipment finance helps exporters to manage their cash flow effectively and efficiently, enabling them to fulfill their export orders in a timely manner.

Examples of Pre-shipment Finance

Here are some examples of pre-shipment finance:

• Advance Payment: Sometimes, buyers may make advance payments to the exporters for their export orders. In such cases, the exporter can avail pre-shipment finance against the advance payment received.
• Export Credit Guarantee Corporation (ECGC) Cover: ECGC provides export credit insurance cover to banks against the risk of non-payment of export dues by overseas buyers. Banks can then offer pre-shipment finance to exporters against ECGC cover.
• Purchase or Discounting of Export Bills: Exporters can also avail pre-shipment finance by discounting or selling their export bills to banks. The bank provides finance to the exporter against the export bills, which are payable on maturity.

Types of Pre-shipment Finance

Pre-shipment finance can be classified into different types based on the nature of the financing. Here are the three main types of pre-shipment finance:

1. Packing Credit: Packing credit is the most common type of pre-shipment finance provided by banks to exporters. It is a short-term finance facility that helps exporters to meet their working capital requirements for the purchase of raw materials, processing, packaging, and transportation of goods. The packing credit is usually granted against a confirmed export order or a letter of credit issued by the buyer.
2. Advance against Incentives: Advance against incentives refers to pre-shipment finance provided by banks against the incentives and subsidies that the exporter is eligible to receive from the government for exporting goods. The incentives can be in the form of duty drawback, income tax refunds, or other benefits.
3. Advance against Export Orders: Advance against export orders refers to pre-shipment finance provided by banks against the confirmed export order received by the exporter. The advance can be utilized by the exporter to meet their working capital requirements for the production, processing, and packaging of goods.

Objectives of Pre-shipment Finance

The primary objectives of pre-shipment finance are as follows:

• Working Capital Needs: Pre-shipment finance helps exporters to meet their working capital requirements for the purchase of raw materials, processing, packaging, and transportation of goods before the actual shipment of goods. This enables exporters to execute their export orders in a timely manner and maintain a steady flow of goods.
• Timely Delivery: Pre-shipment finance ensures timely delivery of goods by providing funding for pre-shipment activities, such as processing, packaging, and transportation. This helps exporters to meet their delivery deadlines and maintain their reputation in the market.
• Competitive Pricing: Pre-shipment finance enables exporters to offer competitive pricing to buyers by providing funding for the purchase of raw materials and other inputs at lower costs. This helps exporters to maintain their competitiveness in the market.
• Risk Mitigation: Pre-shipment finance also helps exporters to mitigate risks associated with non-payment by buyers or delays in payment. The financing is usually provided against a confirmed export order or a letter of credit, which serves as collateral and reduces the risk of non-payment.

Functions of Pre-shipment Finance

The functions of pre-shipment finance are as follows:

• Meeting Working Capital Needs: The primary function of pre-shipment finance is to provide exporters with the necessary funds to meet their working capital needs for the purchase of raw materials, processing, packaging, and transportation of goods before the actual shipment of goods.
• Sourcing of Raw Materials: Pre-shipment finance enables exporters to source raw materials and other inputs at lower costs, as they can take advantage of bulk purchases or other discounts offered by suppliers. This helps exporters to maintain competitiveness in the market.
• Export Documentation: Pre-shipment finance also assists exporters in the preparation of export documentation, such as export invoices, packing lists, and shipping documents, which are required for customs clearance and other regulatory purposes.
• Logistics Support: Pre-shipment finance may also provide support for logistics and transportation, such as hiring trucks or other modes of transportation to move goods from the factory to the port or airport.
• Risk Mitigation: Pre-shipment finance may also provide some protection against the risk of non-payment or delayed payment by buyers. Financing is usually provided against a confirmed export order or a letter of credit, which serves as collateral and reduces the risk of non-payment.

Elements of Pre-shipment Finance

The elements of pre-shipment finance include the following:

• Purchase Order: Pre-shipment finance is provided against a confirmed export order or purchase order from a buyer. The purchase order serves as proof that there is demand for the goods and that the exporter has a legitimate order to fulfill.
• Export Contract: An export contract is an agreement between the exporter and the buyer that outlines the terms and conditions of the export transaction. The contract may include details such as the price of goods, delivery terms, payment terms, and other relevant information.
• Letter of Credit: A letter of credit (LC) is a financial instrument issued by a bank that guarantees payment to the exporter once the goods have been shipped and all the required documents have been submitted. The LC serves as collateral and provides assurance to the exporter that they will receive payment for their goods.
• Packing Credit: Packing credit is a short-term working capital loan that is provided to the exporter to purchase raw materials, process the goods, and package them for export. The loan is provided on the basis of the export order or letter of credit.
• Insurance Cover: Pre-shipment finance may also include insurance coverage for the goods being exported. The insurance cover provides protection against loss or damage to the goods during transit, which reduces the risk of financial loss for the exporter.

Post Shipment Finance

Post-shipment finance refers to any form of financial assistance, credit or loan provided by a financial institution to an exporter after the shipment of goods. This finance is granted against the proof of shipment, such as bills of lading or other shipping documents, and is designed to meet the exporter’s working capital needs until the payment for the exported goods is received. In other words, post-shipment finance is provided to bridge the gap between the date of shipment and the date of payment realization from the importer. The objective of post-shipment finance is to help exporters meet their cash flow requirements and reduce the risk of payment defaults, enabling them to focus on their core business activities.

Examples of Post Shipment Finance

Here are some examples of post-shipment finance:

• Letter of Credit Discounting: In this arrangement, the bank or financial institution discounts the letter of credit provided by the importer, providing immediate cash flow to the exporter.
• Foreign Bill Purchasing: This refers to the purchase of a foreign bill by a bank or financial institution, which is payable by the importer, at a discounted rate. The exporter receives immediate cash in exchange for the bill.

Types of Post Shipment Finance

Post-shipment finance can be broadly classified into the following types:

1. Export Bill Discounting: Under this arrangement, the bank or financial institution buys the exporter’s bill of exchange or invoice at a discounted rate, providing immediate cash flow to the exporter.
2. Export Packing Credit: Similar to pre-shipment finance, export packing credit is a short-term loan provided to exporters to finance the post-shipment stage, such as warehousing and transportation costs, until the payment for the exported goods is received.
3. Export Factoring: Export factoring is a financial arrangement where the exporter sells their receivables or invoices to a third-party factor at a discounted rate in exchange for immediate cash. The factor then collects payment from the importer on behalf of the exporter.
4. Letter of Credit Discounting: In this arrangement, the bank or financial institution discounts the letter of credit provided by the importer, providing immediate cash flow to the exporter.
5. Foreign Bill Purchasing: This refers to the purchase of a foreign bill by a bank or financial institution, which is payable by the importer, at a discounted rate. The exporter receives immediate cash in exchange for the bill.
6. Advance Against Export Incentives: Under this scheme, the bank provides finance to the exporter against the incentives provided by the government for exports, such as duty drawbacks, income tax refunds, etc.
7. Advance Against Export Receivables: In this scheme, the bank provides finance to the exporter against the receivables due from the importer, after deducting the applicable charges and commissions.
8. Post-Shipment Foreign Currency Loans: In this scheme, the bank provides loans to the exporter in foreign currency, which can be repaid from the export proceeds. This helps the exporter avoid currency risk and fluctuations in exchange rates.

Objectives of Post Shipment Finance

The main objectives of post-shipment finance are:

• To provide immediate cash flow to the exporter: Post-shipment finance provides immediate cash flow to the exporter, enabling them to meet their working capital requirements and continue their business operations smoothly.
• To provide liquidity to the exporter: Exporters may face a liquidity crunch after the shipment of goods, as they have to wait for the payment to be received from the importer. Post-shipment finance helps in providing liquidity to the exporter during this period.
• To facilitate the growth of exports: Post-shipment finance helps exporters to expand their business and increase their exports by providing them with the necessary funds to finance their post-shipment activities.
• To reduce the credit risk of the exporter: Post-shipment finance reduces the credit risk of the exporter by providing them with the necessary funds to finance their post-shipment activities. This helps them to avoid defaults and delays in receiving payments from the importer.
• To promote international trade: Post-shipment finance plays an important role in promoting international trade by providing the necessary funds to finance post-shipment activities and ensuring that the exporters can continue to trade with their overseas partners.

Functions of Post Shipment Finance

The main functions of post-shipment finance are:

• Financing export receivables: Post-shipment finance helps exporters to finance their export receivables by providing them with the necessary funds to meet their working capital requirements.
• Discounting of export bills: Post-shipment finance enables exporters to discount their export bills and receive immediate cash flow.
• Factoring of export receivables: Export factoring is a service offered by post-shipment finance providers, which involves the purchase of the exporter’s accounts receivables by the factor. This helps the exporter to receive immediate cash flow and reduces the risk of non-payment.
• Providing bridge finance: Post-shipment finance provides bridge finance to exporters, which helps them to bridge the gap between the time of shipment and the receipt of payment from the importer.
• Financing of export-related activities: Post-shipment finance helps exporters to finance their post-shipment activities such as warehousing, packaging, transportation, and other related expenses.
• Providing credit guarantees: Post-shipment finance providers may offer credit guarantees to exporters, which reduces the risk of non-payment by the importer.

Elements of Post Shipment Finance

The elements of post-shipment finance include:

• Export bill purchase: This involves the purchase of export bills by the post-shipment finance provider. The exporter receives immediate cash flow, and the post-shipment finance provider takes on the responsibility of collecting payment from the importer.
• Export bill discounting: This involves the discounting of export bills by the post-shipment finance provider. The exporter receives immediate cash flow, but the post-shipment finance provider deducts a discount charge from the bill amount.
• Export factoring: This involves the purchase of export receivables by the post-shipment finance provider. The exporter receives immediate cash flow, and the post-shipment finance provider takes on the responsibility of collecting payment from the importer.
• Export credit insurance: This is a service provided by the post-shipment finance provider to protect the exporter from non-payment by the importer.
• Export packing credit: This is a short-term loan provided by the post-shipment finance provider to finance the export-related activities of the exporter, such as warehousing, packaging, transportation, and other related expenses.
• Advance against export incentives: This is an advance provided by the post-shipment finance provider against export incentives receivable from the government.
• Advance against export duty drawback: This is an advance provided by the post-shipment finance provider against duty drawback receivable from the government.

Important Difference Between Pre-shipment and Post-shipment Finance

Here’s a table that highlights the important key features and differences between pre-shipment and post-shipment finance:

Key Difference Between Pre-shipment and Post-shipment Finance

In addition to the features highlighted in the table, there are key differences between pre-shipment and post-shipment finance, including:

1. Purpose: Pre-shipment finance is provided to help exporters finance their activities before the shipment of goods, while post-shipment finance is provided to help exporters manage their working capital needs after the shipment of goods.
2. Timing: Pre-shipment finance is provided before the shipment of goods, while post-shipment finance is provided after the shipment of goods.
3. Security: Pre-shipment finance is typically secured against purchase orders or letters of credit from buyers, while post-shipment finance is secured against shipping documents or export bills.
4. Tenure: Pre-shipment finance is typically short-term, while post-shipment finance can be both short-term or long-term depending on the nature of the export transaction.
5. Risks: Pre-shipment finance carries risks such as credit risk, political risk, and foreign exchange risk, while post-shipment finance carries credit risk and political risk.

Similarities Between Pre-shipment and Post-shipment Finance

There are several similarities between pre-shipment and post-shipment finance, which include:

1. Collateral: Both pre-shipment and post-shipment finance require collateral to secure the financing. In the case of pre-shipment finance, the collateral can be purchase orders or letters of credit from buyers, while in the case of post-shipment finance, the collateral can be shipping documents or export bills.
2. Financing options: Both pre-shipment and post-shipment finance provide exporters with various financing options to manage their cash flow, such as packing credit, bill discounting, and advances against incentives or duty drawback.
3. Creditworthiness: Both pre-shipment and post-shipment finance require the exporter to have a good credit standing, as the financing is typically extended based on the exporter’s creditworthiness and reputation in the market.
4. Export documentation: Both pre-shipment and post-shipment finance require proper export documentation to support the financing, such as invoices, bills of lading, and customs declarations.
5. Risk management: Both pre-shipment and post-shipment finance help exporters manage the risks associated with international trade, such as credit risk, political risk, and foreign exchange risk.

Conclusion Between Pre-shipment and Post-shipment Finance

In conclusion, pre-shipment and post-shipment finance are two types of financing options that are available to exporters to manage their cash flow and working capital needs. Pre-shipment finance is provided to exporters before the shipment of goods to cover the expenses related to the production, processing, and packaging of goods, whereas post-shipment finance is provided after the shipment of goods to cover the expenses related to the marketing, distribution, and payment collection of goods.

Both pre-shipment and post-shipment finance are crucial for exporters to ensure smooth and efficient international trade operations. They provide exporters with various financing options to manage their cash flow, support their working capital requirements, and mitigate the risks associated with international trade. Moreover, they require collateral, good credit standing, proper export documentation, and risk management strategies to secure the financing and ensure timely repayment.

Therefore, exporters must carefully assess their financing needs and evaluate the various pre-shipment and post-shipment finance options available to them before selecting the most suitable financing option that meets their requirements and aligns with their business goals.