Difference Between Pre-Shipment and Post-Shipment Finance

Introduction

Export finance is classified as pre-shipment or post-shipment finance, depending on when the funding is supplied.

As the name suggests, pre-shipment finance is credit granted to exporters before the shipment of products, and post-shipment finance is credit granted after the items have been sent.

Pre-Shipment Finance

Pre-shipment finance is the financial assistance offered to the exporter between the receipt of the export order and the actual shipment of goods. It could be fund-based or non-fund-based financing.

The primary goal of extending pre-shipment finance is to meet the working capital needs of the exporter/seller of goods, such as the purchase of raw materials, labour, packaging material, etc., processing or conversion into final goods, packaging, warehousing, transportation or shipping, and other pre-shipment expenses on products that are intended to be exported overseas.

A purchase order from a recognised buyer, as well as documentary evidence such as a letter of credit or guarantee, are issued on behalf of the buyer and in favour of the exporter.

Classification of Pre-Shipment Finance

Pre-shipment financing might be of three types:

• Packing Credit
• Advance against government receivables guaranteed by ECGC.
• Advance against cheques received as advance payment.

Benefits of Pre-Shipment Financing

There are many benefits that come from using pre-shipment finance, such as:

Improved Cash Flow

Pre-shipment financing can assist firms in improving their cash flow by providing the finances required to purchase and transport goods or services for export. This can help firms better manage their financial resources and lessen the likelihood of financial troubles.

Enhanced Competitiveness

Pre-shipment financing can help businesses compete in international markets by providing the finances required to capitalise on export prospects.

Increased Flexibility

It can give firms more flexibility in their operations by allowing them to finance the purchase and transportation of goods or services for export as necessary.

Reduced Risk

Pre-shipment financing enables firms to limit the risk of financial loss by providing the finances required to purchase and transport products or services for export. This can help organisations manage risks more effectively and boost their chances of success in international marketplaces.

Improved Supplier Relations

It can assist firms in strengthening their connections with suppliers by providing the finances required to purchase goods or services for export on schedule. This enables businesses to negotiate better terms and conditions with their suppliers, increasing their competitiveness and profitability.

Post-Shipment Finance

Post-shipment finance can be described as any type of advance or credit provided to an exporter by a financial institution following the dispatch of goods.

It is only available to exporters whose items have been exported or whose export documentation has been transferred. Furthermore, finance is extended on a short or long-term basis, depending on the nature of the export. The financing is provided against the shipment paperwork, which serves as verification that the products are being sent. Post-shipment financing can help you make the best use of your operating capital.

Classification of Post-Shipment Finance

Post-shipment finance can be classified into three types:

• Export bills are purchased, discounted, or negotiated.
• Advance against a tariff deduction due from the government.
• Advance against bills sent to collection.

Benefits of Post-Shipment Finance

Improved Cash Flow

Exporters who get payments quickly after exporting goods can maintain a consistent cash flow, which is important for managing operational expenditures and reinvesting in the firm.

Better Working Capital Management

Exporters can better manage their working capital by allocating cash from post-shipment financing to manufacturing expenditures, raw materials, and other expenses.

Growth Opportunities

Access to finance allows exporters to accept larger orders and increase their market reach without worrying about the time gap between shipping and payment.

Favorable Financing Terms

Financial institutions may provide attractive financing terms and interest rates, particularly if the transaction is supported by export credit agencies or guaranteed by trustworthy purchasers.

Enhanced Creditworthiness

Regular use of post-shipment financing can help exporters enhance their credit rating, making it simpler to get future financing at better conditions.

Key Differences

The following points make a significant difference between pre-shipment and post-shipment financing:

• Pre-shipment finance allows exporters to meet their purchasing, processing, and packing needs before the goods are sent. Post-shipment finance, on the other hand, is a loan/advance facility that covers exporters' cash or liquidity requirements during the time lag between the shipment of goods and the receipt of payments.
• The fundamental goal of pre-shipment finance is to provide the required funds to assist exporters in obtaining raw materials, labour, and supplies to manufacture, package, store, and transport the goods. In contrast, the main purpose of post-shipment finance is to provide funds to exporters from the time they submit their shipping documents to the bank until they receive payment for their exported goods.
• Pre-shipment finance includes both payment and performance risk, whereas post-shipment finance primarily includes payment risk.
• There isn't a set way to decide how much money an exporter should receive for pre-shipment financing. However, for post-shipment financing, exporters can receive up to 100% of the invoice value of the goods they have shipped.

Comparison Chart

Eligibility

• Pre- and post-shipment financing is provided to all sorts of exporters, including merchant exporters, manufacturer exporters, export and trading houses, manufacturers selling goods to export houses (EH), trading houses (TH), and merchant exporters.
• It can also be provided by banks, NBFCs, and other financial organisations.
• While the RBI supervises before-and post-sale loans with severe laws or limits, other types of credit and advances are subject to comparatively little regulation. This has given rise to a number of trade finance technology platforms, such as Drip Capital.

Conclusion

Export finance is a significant tool that helps exporters at all phases of the trade process, including pre-shipment and post-shipment financing. Pre-shipment finance enables exporters to handle their working capital requirements, such as acquiring raw materials and preparing items for exportation. In contrast, post-shipment finance offers liquidity after the items have been dispatched, providing consistent cash flow and effective working capital management. Exporters may use these financial instruments to improve their operations, increase their market reach, and achieve long-term success in foreign markets by understanding the specific aims and benefits of each.