Introduction
Buying and selling goods is an ongoing process throughout the world. Some people require essential and non-essential items to live and survive every day. The purchasing of products from any retailer or supermarket is necessary for humans to live an entire and happy life. It is not a widely known fact that each product bought to market is made or assembled in various parts of the globe before being sold at retail stores.
Trade requires financial commitments throughout the process. In particular, export finance is the primary financial element that is a part of purchasing and selling items.
Export finance can be classified into various stages of financing. Two of the most popular financial aspects are Pre-Shipment Financing and Post Shipment Finance. Both Pre-shipment and Post-shipment favour exporters because they carry an essential risk element for the deal.
Pre-Shipment vs Post-Shipment
The primary distinction between Post-shipment and Pre-shipment is that pre-shipment provides the exporter financial aid before the goods are shipped. In contrast, post-shipment offers financial assistance once the items are delivered. Post-shipment eliminates the risk of financial loss in the "in-between" period of shipping and proceeds realization.
Difference between Pre Shipment and Post Shipment in tabular form
| Parameters of Comparison | Pre-Shipment | Post Shipment |
| Meaning/Definition | It's financial assistance provided to the exporter/seller before the product being shipped out or exported. | It's financial assistance provided to the exporter/seller before the product is shipped out or exported. |
| Usage | Pre-Shipment Finance aids the exporter to prepare the goods needed for shipment. 1. Purchase of raw materials 2. Producing End-to-End Products 3. Packaging | Post-Shipment finance allows the exporter to pay his suppliers. This helps exporters avoid waiting for the payment to be received by the seller. |
| Percentage of Interest | 0.075 | 0.0865 |
| Documents required | Export Orders | Export Shipping Documents |
| Repayment Conditions | Depends on the proceeds of the Contract. | Depends on the proceeds of Exports. |
What is Pre-shipment?
Pre-shipment financing is the financial aid to the exporter starting from receiving the order for export until the actual date of shipment of the goods. It could be fund-based or non-fund-based finance.
The primary reason for extending the pre-shipment financing is to meet the needs for the working capital of the seller/exporter, like the purchase of raw materials, labour, packaging materials, and so on.
Processing or transformation into final products packaging, warehousing shipping or transportation, and other expenses before shipping the goods intended for export to other countries.
In this regard, you need a purchase request from a known buyer/documentary proof like a letter of credit or a guarantee given on behalf of the buyer and for the seller's benefit.
Classification of Pre-Shipment Finance
Pre-Shipment financing can come in three kinds:
- Packing Credit
- Incentives, receivables, and advances from the Central Government are protected by the ECGC guarantee.
- Advance against cheques that are accepted as an advance payment.
Types of Pre-shipment
Extended Packing Credit Loan
Banks can offer Extended Packing credit to customers with a good credit score. The repayment period extends over the standard 180 days.
Secured Shipping Loans
Exporters can benefit from this loan after the product is ready to ship.
Amounts owed against Back-to-Back Letters of Credit
Banks offer this packing credit to exporters against a Back-to-back-LC.
Red or Green Clause Letter of Credit
The Red Clause LC is one kind of packing credit offered by banks when the supplier cannot allocate enough funds to produce the products required for the export request. The seller can open a Red Clause LC with a red-coloured clause that authorizes the bank to make the payment necessary to the vendor to satisfy the demand for working capital.
The Green Clause LC works in the same manner; however, it covers only the storage cost for products on the ship. In India, you must obtain the approval of the Government to allow both of these LCs.
The latest developments in opposition to export incentives
Export Incentives can be accessed in the post-shipment and a pre-shipment phase. It's a credit granted by the lender to an exporter in exchange for incentives to which the exporter is entitled later. After the exporter has received encouragement, they have to pay the bank that loaned the money.
Advances Against Duty Drawback
Like the US administration's drawback on-duty program, the Indian Government encourages exports by giving duty drawbacks to the raw materials used to make the final product for exports. Banks offer packing credits for 90 days to refund such funds.
Credit Facilities for Packing for Consultant Services
When it comes to consulting services, exporters need no issue with the movement of goods outside of the Indian Customs Territory. In these instances, the bank offers pre-shipment financing to enable the exporter to mobilize resources such as technical personnel and train them.
Racking credit Facilities to Deemed Export
Created to help multilateral funds programs and projects protected by global tenders, for which the payments are made in foreign tree exchange, can also be eligible for a concessional rate of interest facility.
What is Post Shipment?
Post Shipment Finance can be defined as any advance, load, or credit provided to an exporter from a bank following the delivery of products. It is imperative to know the date for providing financial assistance is after the delivery of goods until the receipt of the proceeds from exporting merchandise.
Post Shipment Finance is granted only to exporters under whose name the products were exported or to whose name the documents about the export were transferred. Furthermore, the financing is extended to short-term or for a more extended period, dependent on the kind of export. The loan is secured against the shipping documents to prove that the product has been transported.
Post-shipment finance can help make use of the working capital in the most efficient way.
Classification of Post-Shipment Finance
Post-Shipment finance can come in three kinds:
- Export bills are bought at a discount or discounted price, or even the price of export bills is discounted.
- Advance against duty drawback payable through the Government.
- Advance against the bills sent to a collection
Types of Post shipment
Export bills that are purchased/discounted
Purchased or discounted export bills are used for international trade transactions that are indisputable to buy a contract of sale or purchase by banks. If such statements are issued, the bank is responsible for granting a particular amount to exporters to facilitate purchasing export invoices.
Secure extended financing for export bills that are negotiated
Since the bank issuing the cheque regulates the payment by LC (Letter of Credit), The risk associated with the cost to the person exporting it is lower in this post-shipment financing option. The risk also decreases when the bank has confirmed the LC and ensures the transfer. This is a safe method in which banks are willing to extend the credit for bills based on providing LC.
But, this approach could nevertheless result in risk situations for the bank in two different scenarios:
The exporter is not a performer and cannot adhere to all conditions and terms. The bank that issued the loan cannot consider this as an LC in this instance.
There is a risk of documentation in which the bank issuing the document decides not to honour its promise.
To avoid a high-risk situation, it's essential for the lending and negotiating bank to review all legal documents before submitting them.
Advance against export bills to facilitate the collection
If discrepancies are discovered in the invoices under LC and LC, it is required to forward the bills for collection. If, for instance, an exporter does not want to discount or purchase the export bill, it will organize to send export bills in a collection-based manner, considering the average rate of exchange for foreign currencies. Banks could lend a part of the export bills to exporters as an advance on collections bills, with a concessional interest rate.
The decision follows the time of transit in the case of DP (Documents against Payments) bills, which is determined beginning at the time of acceptance by the documents exported to be collected by the banks. After buyers from overseas have paid the export bills, the amount is credited with post-shipment credits. Suppose the payment by an international buyer doesn't occur within the specified time. In that case, The bank is entitled to determine the number of pending export invoices and charge the commercial interest rate equal to the amount of advance.
Export finance based on consignment.
A bank is also able to finance exporters when the items are shipped in a consignment to be sold at the risk of the exporter, and the consignee is the one who initiates the final payment of selling the goods to exporters. In this instance, the bank's role is to inform its counterpart in the other country to only issue the document if the proceeds from sales are delivered within the time frame specified.
This is a strict requirement even when specific trades permit the payment of the partial estimated value of exports to be drawn up in advance.
In the case of trading, which involves Indian-owned warehouses in overseas locations, the optimal realization period is 15 months.
The finance against the undrawn balance
To avoid certain complexities or to prevent certain complexities and disputes in trade, a tiny portion of the amount is not drawn for final adjustments to account for variations in the exchange rate or consignment weight, aspects, etc. In certain instances, banks will provide post-shipment credit against the undrawn balance if the balance is at the usual level of compensation (which typically is 10% of the export value maximum).
To ensure transparency and reduce risk, the exporter must sign an assurance that they will complete the balance profits from the export within six months of either the date of payments or from the day of the shipment, whichever is later.
Advance against claims for duty drawback
The duty drawback is paid by the Government's customs department as a form of assistance to exporters within their home country after submitting their export documents to customs authorities. The bank provides the money to cover such drawbacks due to customs when the exporter files all essential documents required for export with their bank to verify the eligibility.
The amount is granted when the cost of production in-house is greater than the price of international imports. This type of financing aids exporters in surviving on the global market.
When the shipment is completed, the claims made by exporters who have supporting documents for export are carefully processed. Once the eligibility requirements have been met and the bank has the authority to accept the loan amount directly from the respective government officials, The bank will sanction the advance against duty drawback.
The passage is provided at a lower interest rate for 90 days. Today the customs department is not taking long to pay duty drawbacks if all documents are in order. It should be noted that financing is provided to an exporter only if the same bank offers another financing for exports to the seller.
Main Differences Between Pre-shipment and Post-shipment in Points
The information below is essential in terms of the distinction between pre-shipment and post-shipment financial services:
- Pre-shipment finance is a solution offered to exporters to make their purchases needed for packaging, processing, and processing before the product is delivered. Contrarily post-shipment financing is a type of loan or advance that fulfils exporters' liquidity or cash needs between the day the goods are delivered and the payment is made.
- The principal goal of pre-shipment financial services is to provide enough funds to assist exporters with getting the raw materials, labour, and other supplies needed to manufacture packages, store, and ship the merchandise. In contrast, the primary objective of post-shipment financing is to provide the funding of export receivables with the delivery of the documents to the exporter's bank until the realization of profits from export products.
- To be eligible for pre-shipment financing, those who qualify are an Export company that has an Export order or LoC in its favour or a company that has no export document or LoC; however, its export products are shipped through merchant exporters as well as the export house. On the other hand, Post-shipment finance can be given to the exporter when the merchandise is delivered by him or the person to whom documents regarding the export are transferred.
- In terms of the repayment source, the money of the contract is the primary source in the case of pre-shipment financing, while the export proceeds are the primary source of post-shipment finance.
- Pre-shipment finance entails both performance and payment risk post-shipment finance covers the risk of payment only.
- Concerning the amount of finance, in pre-shipment financing, no formula exists to calculate the amount of funding that can be extended to exporters. In contrast, up to 100 percent of the invoice value of the goods shipped may be granted post-shipment financing.
Conclusion
Pre-shipment financing is offered to the exporter for an initial period because the term implies working capital financing. In contrast, post-shipment finance can be extended either for a short or extended period, depending on the specifics of the trade.
The business of exporting and importing is risky.
Risks can be prevented by the financial aid that banks offer to exporters. Furthermore, the pre-shipment remains the sole responsibility of the exporter, whereas post-shipment may assist buyers as well. This will help them get their markets ready for items to be sold.
International trade requires support from the Government as well. The countries that participate in the trading have their banks backed by their respective governments. This is a decent object for the popular of realms. Exporters are cautious and can determine this aspect before beginning the business.