EXIM Landscape
What Is the Difference Between Pre and Post-shipment Finance?
When you consider the export business, you realize that finance becomes even more critical considering the global nature of the company. Exporters are constantly seeking trade finance solutions to ensure the running of their businesses. To understand the impact of financial support in the export business, you must understand the process and the kind of finance required at each stage.
Broadly speaking, export finance can be divided into pre-shipment finance and post-shipment finance. However, we need to understand which part of the export process falls under which category.
The production and shipment phases
- Start the marketing and sales process to get orders while ensuring that the pricing and other terms are acceptable to both parties
- Simultaneously start procuring machinery for production, source raw materials, and consumables for production
- Once the order is confirmed, arrange for appropriate packing and figure out the logistics involved to ensure the goods reach the importer without compromising the quality during the move
- Contact local transporters to get to the port for shipping, liaising with the Customs House Agent to prepare the documentation for shipping
- Arrange for insurance during the shipping process and get documents like the commercial invoice, packing list, bill of lading or airway bill, certificate of origin, and export declaration, and do the needful for compliance with Incoterms
- Get customs clearance for shipping and ship the goods along with the documentation, informing the importer
- Once the importer confirms that they have received the goods and accept the consignment, the exporter will raise the invoice per the agreed-upon terms and wait for the payment
The receipt of payment will close the cycle for this transaction. However, the exporter must complete the many steps of the cycle to continue gaining business and delivering products as per the order.
What does pre-shipment finance for exports mean?
As the term suggests, pre-shipment finance for exports will be the finance that an exporter needs before they send the shipment to the buyer or importer. The funds, in this case, will be used to prepare the products and transport them to the point of international departure.
Pre-shipment finance can be needed for:
- To keep the production going with raw materials and consumables
- Pay overheads like utility bills, wages, and other related expenses
- For quality-checking, packaging, and getting the goods ready for export
- Meet the logistics of storing and transporting the goods to the port for shipment
- Getting certificates, clearances, and other documentation ready for export
What does post-shipment finance for export mean?
Once again, the term is self-explanatory and denotes that this is finance an exporter will need once the shipment is sent and, in most cases, before the buyer’s payment is received. The exporter will need post-shipment finance to process other orders, pay for operational expenses, and so on.
Post-shipment finance can be needed for:
- To tide the exporter over once the goods have been received, but the payment is expected after a while
- For the payment of raw materials and other expenses that have been purchased on credit
- Meet expenses related to shipping, transportation, insurance, documentation, and freight
- Exporters must prepare for further orders, for which they will require post-shipment funding to keep the business running
What are the different types of financing options available to exporters?
Exporters can tap into various options to arrange finance for their business; these can include:
| Pre-shipment financing options | Post-shipment financing options |
|---|---|
| Finance like packing credit, working capital funding, against orders received and backed by the buyer’s letter of credit | Bills discounting facilities against fulfilled order |
| Working capital finance based on the order book and current inventory | Factoring and forfaiting arrangements based on due invoices |
| Capital finance from financial institutions to purchase capital equipment | Though not a financing option, insurance against non-payment can also be considered |
As you can see, exporters have a variety of options for pre-shipment and post-shipment financing from various private and government sources. It is critical for exporters to explore these options and select the right one to run a profitable business. Along with finance options, exporters should also consider innovative solutions for their inward remittance needs by choosing a platform like LeRemitt.
