Pre and Post-Shipment Credit

Pre-shipment and post-shipment credits are financial tools used to support exporters in managing cash flow and covering expenses throughout the export process. These credit facilities ensure that exporters have the necessary working capital to produce, ship, and manage their goods efficiently, from the initial stages of production to the final receipt of payment.

 

1. Pre-Shipment Credit

Definition:
Pre-shipment credit is financial support provided to exporters before the goods are shipped. It is designed to help them cover costs associated with manufacturing, processing, packaging, and transporting goods up to the port of shipment.

Purpose:
This type of credit supports exporters in fulfilling export orders by financing the production stage, which includes purchasing raw materials, covering labor costs, and other production-related expenses.

Types of Pre-Shipment Credit:

• Packing Credit: This is the most common form of pre-shipment credit where banks offer funds to exporters against confirmed export orders. The funds are specifically used for production and packaging purposes. In India, packing credit is often granted in foreign currency (PCFC) to avoid exchange rate risks.
• Advance Against Export Orders: Some buyers may provide an advance payment against confirmed export orders, which can serve as pre-shipment finance.

Example in India:
An Indian garment exporter receives a packing credit loan from a bank to cover the costs of fabric, stitching, and labor for an order destined for a European buyer. The loan allows the exporter to fulfill the order without using internal working capital.

Benefits of Pre-Shipment Credit:

• Cash Flow Support: Provides working capital to initiate production, ensuring exporters can meet order deadlines without cash flow issues.
• Reduced Cost of Funds: Interest rates on pre-shipment credit are typically lower than regular loans, which reduces financing costs for exporters.
• Risk Mitigation: In India, packing credit loans can be extended in foreign currencies, such as U.S. dollars or euros, reducing currency risk for exporters receiving payments in foreign currencies.

2. Post-Shipment Credit

Definition:
Post-shipment credit is financial assistance provided to exporters after the goods have been shipped. This type of credit allows exporters to manage the waiting period between shipment and final payment by the buyer, covering the gap from the time goods are dispatched to when payment is received.

Purpose:
Post-shipment credit supports exporters by providing them with immediate cash flow after shipment, thus ensuring they can continue their operations smoothly without waiting for the buyer's payment, which may take weeks or months.

Types of Post-Shipment Credit:

• Export Bills Discounting: Banks purchase the exporter’s bills (invoices) at a discount, providing immediate funds while waiting for payment from the buyer.
• Advance Against Export Receivables: Banks offer advances against expected payments from export receivables, allowing exporters to receive funds before the buyer’s payment is due.
• Letters of Credit (LC) Financing: In cases where a sale is backed by a letter of credit, banks may offer financing against the LC, ensuring the exporter receives payment while waiting for the buyer’s bank to remit the payment.
• Export Credit Against Collection of Bills (ECCB): This form of credit is available to exporters who ship goods on credit terms. Banks provide credit based on the submitted export bills awaiting collection.

Example in India:
An Indian pharmaceutical company exporting to the United States can discount its export bills with its bank to receive payment immediately after shipment, rather than waiting 90 days for the buyer’s payment. This ensures the company maintains positive cash flow for other operations.

Benefits of Post-Shipment Credit:

• Cash Flow Continuity: Post-shipment credit helps exporters maintain steady cash flow even if buyers delay payment.
• Reduces Credit Risk: Exporters can avoid the risk of payment delays by receiving funds immediately through bill discounting or other credit options.
• Enables Competitive Terms: Post-shipment credit allows exporters to offer buyers favorable credit terms without affecting their own working capital.

 

Pre-Shipment vs. Post-Shipment Credit: A Comparison

Feature	Pre-Shipment Credit	Post-Shipment Credit
Purpose	To finance production and shipment preparation	To finance cash flow after shipment
When Provided	Before goods are shipped	After goods are shipped
Examples	Packing Credit, Advance Against Orders	Bill Discounting, LC Financing, ECCB
Interest Rates	Generally lower	Typically higher than pre-shipment
Risk Coverage	Covers production and operational risk	Covers payment delay risk

 

Importance of Pre and Post-Shipment Credit in International Trade

1. Ensures Smooth Cash Flow: These credits ensure exporters maintain cash flow at every stage, from production to receipt of payment, preventing disruptions in their operations.
2. Enhances Export Competitiveness: By accessing pre-shipment and post-shipment financing, exporters can offer better payment terms to international buyers, improving their market competitiveness.
3. Reduces Financial Risks: With options like export bill discounting and LC financing, exporters can manage credit risks and receive timely payments despite any delays by foreign buyers.

Pre-shipment and post-shipment credit are vital tools for exporters, helping them overcome financial barriers and manage cash flow during the export cycle. These credits allow exporters to meet their production and shipment obligations, offer competitive payment terms, and mitigate risks associated with payment delays. Indian exporters, supported by banks and financial institutions like the Export-Import Bank of India (EXIM) and commercial banks, benefit from these facilities, enabling them to expand and thrive in international markets.