Pre-Shipment and Post-Shipment Finance

 An exporter needs finance for processing/ manufacturing / assembling / procuring / packing the goods for export. Pre-shipment finance is provided to the exporter to meet such requirements. After the shipment is made, the exporter will have to give credit to the importer for an agreed period. Even if no credit is provided, the exporter will have to wait till the documents reach the importer and he makes the payment.

It will take some more time before the advice of payment is finally communicated to the exporter.
Post-shipment finance is provided to the exporter to meet his needs for funds during the intervening period between the shipment of the goods and the receipt of payment.

Pre-Shipment Finance or Packing Credit

It provides the exporters working capital between the time of the receipt of order and the time of shipment to arrange for production or procurement of goods. Pre-Shipment finance is of particular importance to small-scale manufacturers and exporters who do not possess sufficient financial resources to meet the expenditure involved in the production of goods for export. Pre-shipment finance is normally provided by the commercial banks.

As in the case of any other advance, the bank takes into consideration a number of factors before making the necessary advance to the exporter namely, 1) honesty, integrity and capital of the borrower, ii) exporters experience in the line, iii) security offered, iv) the rate of interest, v) the banks experience about the exporter and vi) standing of the foreign buyer. The security can be provided in the following form: i) Letter of credit, ii) Confirmed order as evidence of having received an order iii) Relevant policy issued by ECGC. iv) Personal bond in the case of the party already known to the banker. Very often manufacturers might have to supply goods to an export house.

In such cases, manufactures may obtain pre-shipment finance on the basis of a letter from the export house containing: i) The obligation of the supplier and ii) a certificate that it is not itself claiming the pre-shipment finance. Pre-shipment finance in such situation would cover the following costs: i) cost of purchase or production, ii) Packing including any special packing for export, iii) Cost of special inspection or tests required by the importer, iv) Internal transport cost, v) Port, customs and shipping agents charges, vi) Freight and insurance charges if the contract is CIF charges, vii) Export duty if any. The concessional rate of interest on pre-shipment finance is 10 percent upto180 days,beyond180 days up to 270 days 13%. Banks are free to charge any interest beyond 270 days Subvention 2%
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Post-Shipment Credit
Post-shipment credits are intended to bridge the financial gap between the time of shipment of goods and the actual payment received by the exporter.
Post-shipment finance is provided in one of the following form: i) Export bills negotiated under letter of credit, Discounting of bills drawn against shipment of goods, iii) Advance against bills under collection.

The rate of interest on post-shipment credit is up to 90 daysnot exceeding 10 percent. Beyond 90 days and up to six months from the date of shipment 12 percent and beyond six months from the date of shipment, banks are free to charge any interest.

Repayment of the loan will generally take place when proceeds are received from abroad.