Types and Realisation Options Available to Exporters | Post Shipment Finance
In international trading, a banker’s commercial credit is usually used as payment for shipped goods. A Letter of Credit [LC] is a financial guarantee provided by a bank to exporters as they ship the goods overseas before receiving the remittance from the importers. Such guarantees or loans are post-shipment credit, and they are a necessity for exporting firms.
There are several types of realisation of post-shipment gains available for exporters. Many exporters turn to banks and fintech companies like KredX to access funds in advance. Some of these financing options are discussed in-depth below.
- Export Bills (Purchased or Discounted)
Export bills are non-Letter of Credit bills that businesses use for indisputable sales contracts/orders. In this global trade transaction model, exporters can approach their banks to get post-shipment credit at concessional rates. The following are the documents one can use for this credit facility:
- Commercial invoices
- Bill of lading
- Shipping bills,
- Financial papers like a bill of exchange
- Sale contract
- Airway bill
- Purchase order
- Certificate of origin, etc.
The banks, in turn, grant post-shipment credit financing to these exporters via purchasing or discounting the bills. Notably, in this scenario, a bank must sanction a specific limit to the exporters regarding the purchase of export bill facility.
- Export Bills Negotiated
This type of realisation of post-shipment profits is applicable for Letters of Credit. Notably, the issuing bank is responsible for overseeing and regulating the payments under L/C. This significantly mitigates the risk of default faced by the exporter. Moreover, under this secure extended financing model, one can avoid unpredictability as the bank will confirm the Letter of Credit and guarantee remittance.
According to this transaction method, the lending bank sanctions funding against bills under the Letters of Credit. However, there can be some notable risks for the exporter’s bank. For instance, the issuing bank may not honour the LC if a non-performing exporter fails to meet the terms and conditions. So, both of these institutions will conduct a thorough assessment of the documents beforehand.
- Advance Against Export on Consignments Basis
A bank can also choose to extend funding to exporters when they send goods as a consignment for sale, at their own risk. In such an instance, the final payment to the exporter against the sale is initiated by a consignee.
The bank works in tandem with its overseas counterpart, advising that the document should only be issued against trust receipt or undertaking of sales proceeds being delivered within a decided date. Notably, the time limit for realisation is 15 months if the export is done through approved Indian-owned warehouses overseas.
- Advance against Bills for Collection
If there are glaring discrepancies in the bills drawn under the L/C, exporters can opt for this type of realisation of post-shipment gains. In this, an exporter can choose to avoid purchasing or discounting bills. Instead, they can arrange to send them on a collection basis to overseas buyers.
Consequently, banks can choose to sanction an advance against these bills to the exporter at a concessional interest rate. When it comes to Documents against Payment (DP) bills, the portion of export bills a bank lends an exporter is dependent on the transit period. This period starts from the day a bank accepts the export documents.
When the amount is received from the overseas importer, it is credited as post-shipment credit. However, if the realisation of the amount is not done over the stipulated period of time, the bank can crystallise these pending export bills. The banks can also charge a commercial rate of interest on the advance amount.
- Advance Against Claims of Duty Drawback
Duty Drawback is a type of discount that exporters get in their own country. This is essentially a supportive measure by government authorities to exporters. Under this scheme, the customs department of the government oversees fund disbursal after an exporter submits the export documents to customs authorities. A bank can provide financial support against the duty drawback receivable from customs if it determines that these documents are credible and eligible.
This type of realisation in post-shipment profits is especially helpful in offering an exporter an additional edge to actively take part in a competitive global marketplace. Notably, a bank grants this advance to exporters at a low-interest rate for a maximum period of 90 days. Moreover, this sanction is only granted if this same bank also offers other export financings to these exporters.
A thorough inspection of the documents submitted by exporters to support their claim begins immediately after a shipment is made. After ensuring that it is eligible to receive an amount directly from government authorities, the bank disburses the claim outlay.
- Advance Against Undrawn Balances
In some instances, an exporter can choose to not draw the full value of the invoice bill. Exporters can do this to ease the final adjustments regarding quality factors, exchange rate differences, consignment weights, etc. In such events, a bank can provide funding against this undrawn balance if it is under 10% of the maximum export value.
The exporters, on their part, need to ensure transparency and minimise the risk proposition in this type of realisation of post-shipment profits. So, they are supposed to submit an undertaking promising to pay the balance amount of the shipment within six months from the payment due date or shipment date, whichever is earlier.
Post shipment financing is a crucial tool for any exporter. This helps exporters have an unrestrained cash flow required to keep their business functioning properly. There are several types of realisations of post-shipment gains, which solve liquidity issues of an exporter due to late payment dates against Letter of Credit and non-Letter of Credit Bills.
In the evolving economy of the country, several leading fintech companies like KredX specialise in offering supply chain-based post-shipment financing solutions.