Adequate financing options are paramount for the success of any export business. Exporters can now avail of multiple financing solutions across different junctures of the transaction that help them establish, solidify, and expand their business. Pre- and post-shipment financing options are two such facilities that enable exporters to carry out a smoother and hassle-free order-to-delivery process.

What is pre-shipment financing?

Once the exporter receives the purchase order, he may opt for pre-shipment finance assistance for procuring raw material; meeting operation and labour costs for the manufacturing process, etc.

What are the types of pre-shipment finance options?

• Trade finance or Import/Export finance: It is a loan pledged against the good itself. The exporter can approach a lender to keep the goods as collateral and obtain up to 80% loan against its actual value. However, the loan amount may vary depending on the nature of the good. For instance, if the exporter is into the perishable goods line of work or deals with lower shelf life or demand, the lender may be reluctant to cover a sizeable part of the value, as it may be difficult to re-sell the goods. If the exporter defaults on a loan, the lender has the right to step in and seize the goods.
• Warehouse finance: Often used as a top-up for existing credit lines, warehouse finance especially becomes essential for the exporter when he is on the lookout for a place to stock up the inventory. The inventory in itself acts as the collateral, against which the lender provides a short-term loan.
• Pre-payment finance It is a different type of financing option, wherein the buyer takes out a loan to pay the seller ahead of shipment and delivery. Once the goods are received and subject to the contract’s clauses- sold, he will then start repaying the lender at the buyer’s end.

What is post-shipment financing?

As indicative of the terminology, post-shipment financing options are sought post the shipment of goods. These typically come in handy during the waiting stage that could stretch for months given the distance and current economic and political conditions. Post shipment, the seller has to typically wait for the buyer to receive the goods, raise an invoice, and make the payment, which usually comes with a buffer period that can last up to three months. This delay in payment can leave the exporter with multiple bills to clear at his end and limited funding. To avoid this, the exporter can seek post-shipment finance against evidence of supplied goods.

What are the types of post-shipment financing?

Letter of Credit

The exporter’s choice of the bank in the native country secures the payment with a Letter of Credit. With inborn security surrounding the LC, banks usually extend a loan against bills under LC.

Advance against claims of Duty Drawback

Duty Drawback is a discount offered by the government to level in international markets when the production cost is higher than international prices. The bank, which typically also offers export finance, then extends a time-bound advance to exporters against the Duty Drawback.

Advance against Undrawn Balance

Exporters often leave some payments undrawn, which the banks can finance against. Note that the undrawn balance must conform to the usual undrawn balance amount in that particular export line for a bank to do so.

Note: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of the right holder of the portal or its employees. The information contained in this article is sourced from empaneled external experts for the benefit of the readers and it does not constitute legal advice. IndiaXports.com, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.