Pre-Shipment Finance:

Every business requires capital to keep its operational activities smooth and uninterrupted. With the help of trade finance, both exporters and importers can meet their financial requirement related to specific stages of trading. For instance, a pre-shipment finance option helps individuals to take care of the expenses an international business is likely to incur during the pre-shipment phase of the venture.

What Is Pre-Shipment Finance?

Pre-shipment finance is a credit option that financial institutions provide to an international business owner dealing in goods or services. As the name suggests, this financing option is availed before finished products are shipped for export. Fundamentally, it helps businesses to meet all their working capital requirements that precede shipment of goods. For example, the fund availed through pre-shipment finance options are used to –

  • Procure raw materials 
  • Meet manufacturing cost
  • Meet the cost of packaging
  • Pay for other pre-shipment expenses
  • Pay wages and salary to employees

Typically, exporters or suppliers of export goods can access funds through this financing option. Under normal circumstances, a purchase order of an acceptable buyer, bank guarantee issued in favour of the seller, a documentary or standby letter of credit prove useful to avail funds under this financing option. 

Pre-shipment finance in India is also known as purchase order finance, packing credit or contract monetisation financing. 

How Does Pre-Shipment Finance Work?

These following pointers highlight the step-by-step process of pre-shipment financing –

  • The buyer arranges a Letter Of Credit or purchase order
  • When in need of funding, the seller submits a request to avail pre-shipment finance
  • A significant portion of the invoice is provided
  • The sales order is met once the goods are shipped
  • On the maturity or payment date, the financier debits the seller’s (client) account

Typically, financial institutions lay down strict eligibility criteria, and levy a substantial fee on the principal amount. They are thorough about document verification and assess the creditworthiness of both buyer and seller to provide a loan.

Types of Pre-Shipment Finance:

These are the most common types of pre-shipment finance – 

  • Extended Packing Loan:

This funding option is provided to help businesses obtain funds immediately so that they can obtain raw materials at the earliest. Once goods are acquired, financial institutions convert this advance as a collateralized loan.

  • Advances Against Back-To-Back Letter Of Credit:

Typically, under this financing option exporters request their banking institution to issue a letter of credit in favour of their suppliers. It allows suppliers to access funds to purchase raw materials or finished items from manufacturers quite conveniently. The said funding option depends on original credit and requires documents that serve as proof for the dispatch of goods mentioned in the same.

  • Red Or Green Clause Letter Of Credit:

A red clause letter of credit allows the negotiating bank to provide cash advance to a beneficiary so that he/she can purchase goods and deliver them to initiate export. Based on terms of payment and documents submitted, a red letter of credit offers either part or full payment.  

A green clause letter of credit provides credit to store goods at the port. With the help of this instrument, the beneficiary will be able to avail funds and use the storage facility as well. Notably, businesses must seek permission from the government to receive this letter of credit in India. 

  • Secured Shipping Loans:

Funds can be availed under this loan option once materials are converted into finished goods or exportable items. Also, the same must have been sent to transport operators for shipment. Mostly, the loan amount is sanctioned on rail receipt and lorry receipt, and exporters must use approved clearing or forwarding agents to transmit goods. 

  • Advances Against Export Incentives:

Cash advances are extended against export incentives and are approved after the goods are shipped. Funds are availed before shipment if the value of materials that need to be produced exceeds the free onboarding limit. Such advances are usually repaid by negotiating export bills and receipts of export invoices.

  • Packing Credit For Imports Against Entitlements Under Advance Licence:

This credit facility can be availed by those who manufacture export goods. However, banking institutions forward this pre-shipment finance facility only if the letter of credit is produced within 60 days from providing the advance. Also, imported materials must be used to produce items that will be exported eventually.

Besides these, pre-shipment credit in foreign currency and advance against duty drawbacks are other noteworthy types of pre-shipment finance in India.

If at any time, businesses find it challenging to meet their working capital requirements, they can avail invoice discounting services from KredX to fund their needs quickly. The financing option helps businesses raise funds within 24-72 hours* and allows them to account for their everyday expenses seamlessly. 

Difference Between Pre-Shipment And Post-Shipment Financing: 

The significant differences between the two forms of financing are given in the table below –

Parameters

Pre-Shipment Finance 

Post-Shipment Finance 

Purpose

It helps to meet the working capital requirement before shipment of goods for export.

It helps to access funds immediately and allows meeting working capital requirements after the shipment of goods.

Time Of Credit

Pre-shipment finance is obtained before goods are shipped.

Post-shipment finance is obtained after goods are shipped.

Required Documents

Letter of Credit or Export Order.

Export Shipping Documents. 

Depending on their requirements, businesses can choose suitable pre-shipment finance without collateral. Subsequently, businesses can raise funds in the post-shipment phase of trading via invoice financing and meet the funding gap between shipment and payment.

KredX, India’s leading integrated cash flow solutions provider, helps businesses raise working capital to  maintain their cash flow. Get in touch with us now to learn more about our invoice discounting services.

Frequently Asked Questions on Preshiment Finance:

A. It is the credit offered to exporters before shipment of goods to meet export orders. Such a loan helps to meet expenses related to the purchase and processing of raw materials as well as packaging of products.