What is Post-Shipment Credit Finance?

Post-shipment credit finance is a type of financial assistance provided to exporters after they have shipped goods to their overseas buyers. This form of financing helps bridge the gap between the shipment of goods and the receipt of payment from the buyer, ensuring that exporters maintain liquidity and continue operations smoothly.

Here are some key aspects of post-shipment credit finance:

Purpose

• Cash Flow Management: Helps exporters manage their cash flow by providing funds immediately after goods are shipped, rather than waiting for the buyer to pay.
• Risk Mitigation: Reduces the risk associated with international trade, such as delays in payment or default by the buyer.
• Business Continuity: Ensures that exporters have the necessary funds to continue production and fulfill new orders without financial strain.

Types of Post-Shipment Credit

Here are the different types of Post-Shipment Credit: 

1. Export Bills Purchase/Discounting

Export bills purchase or discounting is a financial arrangement where exporters sell their export bills (also known as bills of exchange or trade receivables) to a financial institution, typically a bank. The bank purchases these bills at a discounted rate, providing the exporter with immediate funds. The bank then collects payment from the buyer at a later date when the bill matures.

Process:

Shipment and Documentation: After shipping goods, the exporter prepares export bills, which include all relevant shipping and transaction documents such as the invoice, bill of lading, and packing list.

Submission to Bank: The exporter submits the export bills to the bank for discounting.

Assessment: The bank assesses the creditworthiness of both the exporter and the buyer. The bank also verifies the authenticity and completeness of the documents.

Discounting: If approved, the bank purchases the bills at a discounted value, providing immediate cash to the exporter. The discount rate is determined based on factors such as the credit risk involved, interest rates, and the time until maturity.

Collection: The bank collects the full payment from the buyer on the bill’s maturity date.

Settlement: Once the buyer pays, the bank settles the transaction. If the buyer defaults, the bank may seek recourse from the exporter, depending on the terms of the agreement.

Benefits:

Immediate Liquidity: Exporters gain quick access to funds, improving cash flow and allowing for reinvestment in business operations.

Risk Mitigation: Banks assume the risk of collecting payment from the buyer, reducing the financial risk for exporters.

Flexibility: This option allows exporters to manage working capital needs efficiently without waiting for payment from buyers.

Considerations:

Cost: The discount rate and fees can impact the overall profitability of the export transaction.

Creditworthiness: Exporters with better credit ratings may receive more favorable discount rates.

2. Advance Against Export Bills Sent on Collection

Advance against export bills sent on collection is a type of post-shipment finance where banks provide exporters with an advance based on export bills that are sent for collection. Unlike discounting, this method does not involve the sale of the bill to the bank. Instead, the bank acts as a collection agent on behalf of the exporter.

Process:

Preparation of Documents: Exporters prepare export bills and submit them to the bank, instructing the bank to collect payment from the overseas buyer.

Assessment: The bank assesses the documentation and creditworthiness of the transaction.

Advance Disbursement: The bank provides an advance, typically a percentage (usually 80-90%) of the bill’s face value, to the exporter.

Collection Process: The bank sends the bill to its correspondent bank or branch in the buyer’s country for payment collection.

Payment Receipt: Upon receiving payment from the buyer, the bank deducts the advance, interest, and fees before remitting the balance to the exporter.

Adjustment: If the buyer fails to pay, the bank will seek reimbursement from the exporter for the advance provided.

Benefits:

Improved Cash Flow: Exporters receive funds in advance, helping to bridge the gap between shipment and payment receipt.

Control: Exporters retain control over the bills as they are not sold to the bank, allowing flexibility in handling payment terms with buyers.

Considerations:

Partial Funding: The advance amount is typically a portion of the bill’s total value, which may not fully cover the exporter’s cash needs.

Interest Costs: Interest is charged on the advance, affecting the exporter’s profit margins.

3. Advance Against Duty Drawback

Advance against duty drawback is a financial facility where exporters receive advances against the duty drawback they are entitled to receive from the government. Duty drawback is a refund of customs duties paid on imported raw materials used in the production of exported goods.

Process:

Shipment and Application: After shipping goods, exporters apply for duty drawback from the government, providing necessary documentation to prove eligibility.

Bank Application: Exporters approach banks for an advance against the expected duty drawback amount.

Verification: Banks verify the exporter’s eligibility for duty drawback and assess the amount likely to be received.

Advance Disbursement: The bank provides an advance based on the duty drawback claim, usually up to 80-90% of the anticipated amount.

Repayment: Once the government releases the duty drawback payment, the bank recovers the advance along with interest and fees.

Benefits:

Cash Flow Enhancement: Exporters can access funds without waiting for government processing, which can be time-consuming.

Utilization of Working Capital: The advance allows exporters to reinvest in production and operational activities.

Considerations:

Processing Time: Delays in government processing of duty drawback claims can impact the timeline for repayment.

Interest Costs: The cost of borrowing can affect the profitability of the export transaction.

4. Advance Against Export Incentives

Advance against export incentives is a form of financing where exporters receive advances against various incentives provided by the government to promote exports. These incentives can include duty credit scrips, merchandise exports from India scheme (MEIS) benefits, and other government-supported schemes.

Process:

Eligibility and Application: Exporters assess their eligibility for export incentives and submit applications to the relevant government bodies.

Documentation: Exporters provide the bank with documentation of their entitlement to export incentives, including government approvals or certificates.

Advance Approval: Banks assess the credibility of the incentive claim and the exporter’s overall creditworthiness.

Funds Disbursement: Upon approval, the bank disburses an advance, typically covering a significant portion of the expected incentive amount.

Incentive Realization: When the government releases the incentive, the exporter repays the advance, along with any applicable interest and fees, to the bank.

Benefits:

Access to Immediate Funds: Exporters can access capital to support ongoing operations and production without waiting for incentive disbursement.

Leveraging Government Support: Exporters can maximize the benefits of government schemes to enhance competitiveness and market reach.

Considerations:

Verification Process: Thorough documentation and verification processes can be required to qualify for advances against export incentives.

Interest and Fees: Similar to other forms of credit, the cost of borrowing can impact net earnings from exports.

How It Works

Here’s how post-shipment credit finance works: 

Shipment of Goods: The exporter ships the goods to the overseas buyer and submits the necessary shipping documents to a financial institution.

Application for Finance: The exporter applies for post-shipment credit by presenting export documents like the bill of lading, invoice, and shipping bill to the bank.

Assessment and Approval: The bank assesses the export documents and the creditworthiness of the buyer. If approved, the bank disburses the funds to the exporter.

Repayment: Once the buyer makes the payment, the exporter repays the bank. The repayment amount includes the principal and any interest or fees charged by the bank.

Benefits

Here are some of the major benefits of post-shipment credit finance:

Improved Cash Flow: Exporters receive funds quickly, allowing them to maintain smooth operations and meet financial obligations.

Competitive Advantage: With access to finance, exporters can offer better credit terms to buyers, enhancing competitiveness in the global market.

Reduced Financial Risk: Exporters mitigate the risk of delayed payments or defaults by transferring some of this risk to financial institutions.

Considerations

Understand some of the key consideration of post-shipment credit finance: 

Cost: Post-shipment credit often involves interest and fees, which can affect the profitability of export transactions.

Creditworthiness: The availability and terms of post-shipment finance depend on the creditworthiness of both the exporter and the overseas buyer.

Documentation: Exporters must maintain accurate and complete documentation to secure post-shipment credit successfully.

Conclusion

Post-shipment credit finance is a helpful tool for exporters to get funds quickly after sending goods to overseas buyers. It ensures that businesses have enough cash flow to continue operations smoothly and reduce risks associated with delayed payments. With different options like Export Bills Purchase, Advance Against Export Bills, Duty Drawback, and Export Incentives, exporters can choose the best solution for their needs. However, they must consider costs, creditworthiness, and proper documentation to make the most of this financial assistance.