The consumer transaction is a never-ending process in the world. People require essential and non-essential things for their living and survival every day. The purchase of goods from any store or a supermarket is inevitable for human life to thrive. It is a less understood fact that every product that is brought is assembled or made in different parts of the world before it reaches the retail outlets.
Trading involves financial requirements at every stage. Especially, export finance is the most important financial factor that revolves around the entire business of selling and buying goods.
Export finance is ideally categorized into many stages of financing. The two most prominent finance aspects are Pre-Shipment Finance and Post Shipment Finance. Both the Pre-shipment as well as Post-shipment favours the exporters as they hold major risk factor in the transaction.
Pre-Shipment vs Post-Shipment Finance
The main difference between Pre-shipment and Post-shipment is that pre-shipment offers the assistance of finance to the exporter before the goods are shipped while post-shipment is the financial assistance offered once the goods are shipped. The post-shipment patches the financial risk factor during the ‘in-between’ period of shipping and proceeds realization.
Comparison Table Between Pre-Shipment and Post-Shipment Finance (in Tabular Form)
|Parameter of Comparison||Pre-Shipment Finance||Post-Shipment Finance|
|Meaning/Definition||It is financial assistance offered to the seller/exporter before the goods are exported/shipped.||It is financial assistance offered to the seller/exporter after the goods are exported/shipped.|
|Usage||Pre-Shipment finance helps the exporter to arrange goods for the shipment.|
1. Buying Raw Materials
2. Manufacturing Finished Products
|Post-Shipment finance helps the exporter to pay his vendors. This practice helps the exporters not to wait for the payment to be received from the seller.|
|Percentage of Interest||0.075||0.0865|
|Documents Required||Export Order or Letter of Credit||Export Shipping Documents|
|Repayment Norms||Depends on the Proceeds of Contract.||Depends on the Proceeds of the Exports.|
What is Pre-Shipment Finance?
Pre-Shipment finance is the financial support offered by the financial institutions to the exporter before the goods are shipped to the buyer. Pre-shipment finance is very crucial for the exporter to set the goods ready for the shipment.
Pre-shipment Finance helps the exporter to
- Purchase raw materials for the goods to be manufactured
- Salary/Wages to the labourers
- Manufacturing of the products
- Packing the Product
Once an order is confirmed from the buyer, it is required of the exporter to honour it. This results in manufacturing the goods as per the client’s requirement. This requirement and other operational expenses are met with the help of Pre-shipment finance. Pre-shipment finance gives complete financial cover to the exporter with a concessional rate of interest.
The banks or financial institutions offer credit for a maximum period of 6 months. The rate of interest is charged up to 7.5%.
The documents required to avail Pre-shipment finance
- Export Order/Purchase Order or
- Letter of Credit
Once these documents are validated, the funds are disbursed to the exporter for further proceedings. Pre-shipment finance is available for the exporters under two categories:
- Credit on Packing
- Advance against any post-dated cheques or drafts produced by the buyer
What is Post-Shipment Finance?
Post-shipment Finance is offered by a bank or a financial institution to the exporter once the goods are exported to the buyer. This is offered to the seller on account of meeting the internal payment demands before the buyer could release the payment from his/her end.
Post-Shipment finance helps the exporter to
- Pay the Labourers
- Pay the Vendors
- Pay any internal expenditure which was incurred while the goods were manufactured.
Ideally, Post-shipment finance is offered to the exporters to bridge the gap between the shipment of goods and the buyer’s payment period. It offers complete cover to the exporter to overcome the risk of non-payment due to the payment delays from the buyer’s side too.
The banks or any financial institutions offer post-shipment finance for up to 6 months. The interest rates charged is slightly higher when compared to pre-shipment finance.
The lender requires clear proof to disburse the funds. The documents required to approve the post-shipment loan are
- Purchase order/ Export Order
- Letter of Credit
- Shipping Evidence
Pre-shipment finance can help the exporter to meet a maximum of 60% of the expenses. The financial assistance at this stage is of huge help to the sellers to meet all their financial demands which were incurred during and after the shipment.
Main Differences Between Pre-Shipment and Post-Shipment Finance
- The main difference between Pre-shipment and Post-shipment finance is the stage when the financial support is offered to the exporters. Pre-shipment happens before even the goods are manufactured while post-shipment is done immediately after the goods are exported.
- Pre-shipment and Post-shipment finance are offered to the sellers to meet their financial demands during the trading process. The former helps to meet the goods manufacturing costs while the latter helps in after shipment expenses.
- The documents required to avail pre-shipment finance is either an export order or a letter of credit while to avail the post-shipment the banks require the shipping evidence.
- The rate of interest also differs between the two. 7.5% is the rate of interest in the case of pre-shipment finance while its counterpart is charged up to 8.65%.
- The repayment of pre-shipment finance depends on the contract while the post-shipment repayment depends on the exports are realized by the buyer.
The export and import business involves risk. The element of risks is averted by the financial help offered by the banks to the exporters. All the more, pre-shipment completely belongs to the exporter while post-shipment can be of help to the buyers too. This shall help them set their market ready for the products to be sold.
Trading internationally requires government support too. The countries involved in the trade have their banks backed by the respective governments. This factor holds good for most of the countries. The exporters are cautious these days and ascertain this factor and only then proceed with the business.