Pre-Shipment Finance PDF

UNIT:-2 Types of International Finance  Pre Shipment Finance.  Post Shipment Finance.  Terms and Conditions from various banks. Pre-Shipment Finance: Every business requires capital to keep its operational activities smooth and uninterrupted. With the help of trade finance, both e...

UNIT:-2 Types of International Finance  Pre Shipment Finance.  Post Shipment Finance.  Terms and Conditions from various banks. 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 It helps to access funds immediately and It helps to meet the working allows meeting working capital Purpose capital requirement before requirements after the shipment of shipment of goods for export. goods. Time Of Pre-shipment finance is obtained Post-shipment finance is obtained after Credit before goods are shipped. goods are shipped. Required Letter of Credit or Export Order. Export Shipping Documents. 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. Types of Post Shipment Finance Below are given the following post shipment finance: 1. Export Bills Negotiated under L/C: if the exporter wants to get a documentary letter of credit and has already done the procedure i.e., submitting the required documents, as the UC mentions, to the bank, the bank is then supposed to negotiate with the exporter and give him the equal amount of post-shipment finance. We should keep in mind that this amount is only given to the exporter when it is converted into liquid form. 2. Purchase/Discount of Export Bills: there are chances of the post-shipment finance to get increased either through purchasing or giving a discount on the export bill. But this is only possible  when the export bills are not covered under credit letter. Before forwarding this opportunity to the exporter, the bank ensures that the exporter has all the details and knows the terms of the export contract. 3. Advance against Bills sent for Collection: Post-shipment amount can also be given When the assistance available under foreign bills purchased has exceeded the limit or when export bills that are drawn under L/C create issues or when it is mandatory to do so in the particular line. 4. Advance against Goods sent on Consignment Basis: When goods are exported on the basis of agreement, post-ship finance is received only after the goods are sold. In this case, the exporter’s bank of the other country has to deliver documents against Trust receipt and then only the post- shipment advance is adjusted. 5. Advance against Duty Drawback: The Government also play a role here by providing incentives to the exporters for example the duty drawback (DBK), these incentives are only provided to the exporters when the shipment of goods and receipts take a step further. Banks offers incentives for both pre-shipment and post-shipment. 6. Advance against Undrawn Balances: in some export markets, exporters do riot draw bills so that they get the full GST value of the goods yet they leave a little amount undrawn which is used further for adjustments so that differences can be seen in rates, weight quality etc. Though these differences gets adjusted once the goods are approved. Banks offer post-shipment finance for these balances. 7. Advance against Retention Money: In the case of exports of capital goods contracts, the importer’s role is to ensure that the project will be completed. He only gives the surety after he or she attains a particular amount from the contract signed. The unpaid part is called retention money. Here also the bank offers post- shipment finance against the amount like these for a period of 90 days. 8. Advance against Deferred Payments: In case of exports of capital goods or construction contracts, exporters receive some amount of the contract, it might be an advance or we might call it some down payment while other remaining balance is received in instalments Features Of Post-shipment Finance The following features of post-shipment finance are mentioned below: 1. Eligibility: Post-shipment finance is availed by several types of exporters such as:  Merchant exporters  Manufacturer exporters  Export houses  Trading houses  Manufacturers that supply goods to Export Houses (EH), Trading Houses (TH) or merchant exporters. 2. Documentary Evidence: Following are the documents through which the exporters can avail the post-shipment finance facility:  Shipping documents which states the fact that the goods are actually shipped for export purpose and no other purpose is being entertained.  Necessary documents which ensures that the facility under which the credit has been availed.  A letter by the export house which certifies that the goods which are being supplied by him is actually being shipped to your country only for export purpose. 3. Purpose: Post- shipment finance is usually given for the following purposes:  To fill the gap between the shipment of goods and releasing the sales proceeds. This gap can only be released by providing working capital.  To pay insurance charges so that there is a surety that insuring of the goods has been done.  After post-shipment finance is given to you, you can pay ECGC premium which ensures commercial and political risks.  Commission and brokerage can only be paid after post-shipment finance has been provided to you.  In order to undertake all the export promotion activities and advertising. 4. Amount of Finance: Post-shipment finance can be granted equivalent to 100% of the GST value of the goods that are exported.  Loans up to Rs. 10 crore are provided to the exporter by the commercial bank, which you can easily refinance from the EXIM Bank.   Loans above Rs. 10 crore but up to Rs. 50 crore are also provided to the exporters by the EXIM bank.  Loans above Rs. 50 crore need clearance from the working group on export finance, which consists of the representatives of the EXIM Bank, the RBI, the ECGC and the exporter's bankers.  Trading houses  Manufacturers that supply goods to Export Houses (EH), Trading Houses (TH) or merchant exporters. In case the contract is very large, they include representatives from the Ministries of Commerce and Finance in the working group. 5. Period of Credit and Rate of Interest: you can also get Post-shipment finance for short-term, medium-term or long-term.  Short-term finance is extended usually till the period of 90days.  Medium-term is usually extended till the period of 90days to 50 years by the commercial bank. 6. Distribution of post-shipment finance: before the loan is distributed, bank has a task of examining the application and all the necessary documents. 7. Maintenance of Accounts, Monitoring and Repayment: According to the RBI directives, the banks have got a role of maintaining a separate account of each packing credit. However, running accounts are only given permission if the exporter is situated in FTZs, EPZs and the 100% EOUs. Post-shipment finance should be used and should be limited only for the purposes for which it is responsible. Hence, the lending bank keeps an eye on the use of finance by the exporter in every area. If there comes any default from the side of the exporter, it will charge him with a high rate of interest. Post-shipment finance is mainly responsible only for the incentives given by the government or against the export proceeds received by the bank. We shall keep in mind that you cannot use the post-shipment finance for the local funds