Are you a business owner looking for ways to finance your international trade transactions? If so, it’s important to understand the difference between pre-shipment and post-shipment finance.
Pre-shipment finance refers to the funding provided to exporters before the shipment of goods while post-shipment finance refers to the funding provided to exporters after the shipment of goods.
Pre vs. Post-Shipment Finance
| Pre-Shipment Finance | Post-Shipment Finance |
|---|---|
| Pre-shipment finance is provided before the shipment of goods, to finance the production and packaging of goods. | Post-shipment finance is provided after the shipment of goods, to finance expenses incurred after shipment, such as warehousing and transportation. |
| It is primarily used to finance the production and packaging of goods, as well as to cover other expenses such as labor costs and raw materials. | It is used to cover expenses such as storage, transportation, and marketing of goods after they have been shipped. |
| Pre-shipment finance is typically secured by the goods themselves or the sales contract, which reduces the risk for the lender. | Post-shipment finance is typically secured by the invoice or bill of lading, which provides some security for the lender. |
| It is considered to be higher risk as the goods have not yet been shipped, which makes it more difficult for the lender to recover their funds if something goes wrong. | It is considered to be lower risk as the goods have already been shipped, which reduces the risk for the lender. |
| Pre-shipment finance is repaid from the proceeds of the shipment, which means that the exporter will only have to repay the loan once they have received payment from the buyer. | Post-shipment finance is repaid from the exporter’s cash flows or the sale of the goods, which gives the exporter more flexibility in terms of repayment. |
| It is usually short-term, with a duration of less than 180 days. | It can be short or medium-term, up to several years. |
| Pre-shipment finance typically has a lower interest rate due to the lower risk involved. | Post-shipment finance typically has a higher interest rate due to the higher risk involved. |
Introduction to pre and post-shipment financing
Pre-shipment financing is a type of short-term loan that is typically used to cover the cost of raw materials or goods that are being shipped. The loan is typically repaid once the goods have been sold.
Post-shipment financing is a type of short-term loan that is typically used to cover the cost of shipping and handling after the goods have been shipped. The loan is typically repaid once the buyer has received the goods and the inspection has been completed.
Similarities between pre and post-shipment financing
- The main similarity between pre-shipment and post-shipment financing is that they are both forms of export financing. Export financing is a type of funding that helps businesses cover the costs associated with shipping goods overseas. This can include things like the cost of materials, labor, shipping, and customs fees.
- Both pre-shipment and post-shipment financing can be used to finance the entire shipment of goods or just a portion of it. The amount that can be financed will depend on the lender and the terms of the loan.
- Another similarity between these two types of financing is that they are both short-term loans. This means that they will need to be repaid relatively quickly, usually within 12 months or less. This repayment timeline can make it difficult for some businesses to qualify for either type of loan, as they may not have the cash flow necessary to make timely payments.
- Both pre-shipment and post-shipment financing involve working with a lender. This lender may be a bank, credit union, or other financial institution.
Advantages of both forms of finance
Advantages of Pre-Shipment Finance:
- Helps exporters to finance the production and packaging of goods, which can be a significant cost.
- Reduces the risk of non-payment from buyers, as the financing is secured by the goods themselves or the sales contract.
- Allows exporters to negotiate better payment terms with their buyers, as they have the funds to produce and ship the goods.
Advantages of Post-Shipment Finance:
- Provides exporters with additional liquidity to cover expenses incurred after shipment, such as storage and transportation costs.
- Allows exporters to take advantage of price fluctuations in the market by holding onto their goods until prices increase.
- Provides exporters with more flexibility in terms of repayment, as they can use their cash flows or the sale of the goods to repay the loan.
How to choose the right form of finance?
First, you need to think about the timing of when you need the funds. Pre-shipment finance is typically used to cover the costs of raw materials and production, while post-shipment finance is used to cover the costs of shipping and exporting goods.
You also need to consider the type of products you are selling. If you are selling perishable goods, pre-shipment finance may be a better option as it can help you get your products to market faster.
If you are selling non-perishable goods, post-shipment finance may be a better option as it can help you with financing export documentation and Letters of Credit.
You need to consider the cost of each type of finance. Pre-shipment finance typically has higher interest rates than post-shipment finance, so it is important to compare the costs before making a decision.
Key differences between pre and post-shipment financing
- Timing: Pre-shipment financing is provided before the shipment of goods, while post-shipment financing is provided after the shipment of goods.
- Purpose: Pre-shipment financing is primarily used to finance the production and packaging of goods, while post-shipment financing is used to cover expenses such as storage, transportation, and marketing of goods after they have been shipped.
- Difference between interest rate and APR
- Difference between treasury and financial management
- Difference between insurance and reinsurance
Conclusion
Pre-shipment financing provides funding to exporters before the shipment of goods to cover the costs of production and packaging, while post-shipment financing provides funding to cover expenses incurred after the goods have been shipped, such as storage, transportation, and marketing. Ultimately, they play a vital role in enabling exporters to conduct international trade by providing them with the necessary funds to operate and manage their businesses effectively.
