Pre-Shipment Finance and Post Shipment Finance

Defination of Pre-shipment Finance

Pre-shipment finance is the financial service provided to the exporter from the date of receiving the 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 seller of the goods such as preparation 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 to be exported.

A purchase order from a buyer/documentary evidence such as a letter of credit or guarantee is issued on the buyer’s behalf and in favour of the exporter.

Types of Pre-Shipment Finance

Pre-Shipment Finance can be of three types:

Packing Credit

Advance against receivables from the Central Government, which is covered by ECGC guarantee.

Advance against cheques received as advance payment.

Post Shipment Finance:

Post Shipment Finance is any form of load, advance or credit offered to the exporter by a financial institution or Bank, after the shipment of goods. It must be noted that the date of providing financial assistance, after the shipment of goods to the payment of proceeds from the exported goods.

Post Shipment Finance is given to only those exporters, in whose name goods were exported or in whose name the documents are made. Moreover, finance is extended for short term or long term, which depends 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 types:

Export bills purchased, discounted or negotiated.

Advance against duty drawback receivable from the government.

Advance against bills sent for collection.

Key Differences:

  1. 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 other hand 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.
  2. The primary objective of pre-shipment finance is to provide finance to assist the exporters in preparing raw material, labour, supplies, so as to produce, package, store and transport the goods. Wherein 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 payment of proceeds from exported goods.
  3. For availing pre-shipment finance, the following persons are eligible – export company possessing export order or LC in its favour, a company which does not possess export order or LC, but the exporting goods through merchant exporters or export houses. Whereas, 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.
  4. 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.
  5. Pre-shipment finance involves both payment and performance risk, while post-shipment finance encompasses payment risk only.
  6. 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.
Conclusion:

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.

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Chandan Kumar Yadav
My name is Chandan Kumar Yadav CDCS, CSDG, CITF, PGDIBO,AML-KYC, CCFE, MLIBF, CSF, 6SIGMA a trade finance professional with an experience of 11 years whereas worked with several stages of letter of credit, bank guarantee and on other payments methods of trade transactions such as documentary collection, open accounts, SBLC etc., I have a fair understanding of Trade Based Money Laundering as well, Blogging related to Trade Finance is my passion and I want to share which I know and learn from others, I have worked with Wells Fargo, Yes Bank Limited and Bank of America, India which helped me to gain knowledge, view of Trade Finance and importance of International Trade in world's economy. Trade Finance is thumping product, everyday we are learning something new so in order to keep learning I started this as one of the platform. . Let's Learn Together

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