Consumer transaction is a never-ending process in the world. People require essential and non-essential things for their living and survival every day.
Trading involves financial requirements at every stage. Especially export finance is the most important economic factor in selling and buying goods.
Key Takeaways
- Export stage: Pre-shipment finance supports exporters during production and packing, while post-shipment finance assists exporters after the shipped goods.
- Purpose: Pre-shipment finance enables exporters to purchase raw materials and meet production expenses, while post-shipment finance helps manage cash flow during the payment period.
- Forms: Pre-shipment finance includes packing credit and advance against incentives, while post-shipment finance encompasses export bills, foreign bills, and export credit.
Pre-Shipment vs Post-Shipment Finance
The difference between Pre-shipment and Post-shipment is that pre-shipment offers financial assistance to the exporter before the goods are shipped. Post-shipment is the financial assistance provided 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
| Parameter of Comparison | Pre-Shipment Finance | Post-Shipment Finance |
|---|---|---|
| Meaning/Definition | Financial assistance is offered to the seller/exporter before the goods are exported/shipped. | Financial assistance is offered to the seller/exporter after the goods are exported/shipped. |
| Usage | Pre-Shipment finance helps the exporter to arrange goods for shipment. 1. Buying Raw Materials 2. Manufacturing Finished Products 3. Packaging | Post-Shipment finance helps the exporter pay his vendors. This practice allows 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 the Contract. | Depends on the Proceeds of the Exports. |
What is Pre-Shipment Finance?
Pre-Shipment finance is the financial support the financial institutions offer to the exporter before the goods are shipped to the buyer.
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.
The documents required to avail of 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.
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.
The lender requires clear proof to disburse the funds. The documents needed to approve the post-shipment loan are
- Purchase order/ Export Order
- Letter of Credit
- Shipping Evidence
The financial assistance at this stage is of enormous help to the sellers to meet all their financial demands 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 when financial support is offered to the exporters.
- Pre-shipment and Post-shipment finance is offered to the sellers to meet their financial demands during trading.
- https://www.ingentaconnect.com/content/hsp/jpss/2012/00000006/00000003/art00004
- https://ieeexplore.ieee.org/abstract/document/5551613/
Last Updated : 11 June, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
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