Understanding Pre-Export Finance: A Comprehensive Guide

Introduction

When a company is preparing to export its goods, there are two main types of export finance available: pre-shipment finance and post-shipment finance. This article focuses on pre-shipment finance, specifically pre-export finance, which provides crucial support to sellers at the initial stage of the export process. We will explore what pre-export finance entails, its benefits, and potential disadvantages.

What is Pre-Export Finance?

Pre-export finance, also known as packing credit, is a form of financing that financial institutions provide to sellers before the shipment of goods. This type of finance helps sellers meet their working capital requirements, ensuring they can produce and ship the goods without delay. The financial institution underwrites the payment risk by verifying the buyer's creditworthiness and securing the payment through a confirmed order or a letter of credit (LC).

Example Scenario

Consider a hypothetical situation where Company A wants to sell its products to Company B. Company A and Company B are located in different regions, and neither has done business with the other before. To ensure the payment and quality of goods, Company A requests a confirmed export order or asks for an LC with terms and conditions agreeable to both parties. Company A then uses this order or LC to request funds from a credit institution, agreeing to pay the interest and maintenance margin. The credit institution provides the required funds to Company A immediately, which can be used for working capital needs.

Advantages of Pre-Export Finance

Immediate Availability of Funds: Sellers can access the necessary funds before the actual shipment of goods, allowing them to address immediate working capital requirements. Reduced Risk: The credit institution further reduces the risk by verifying the buyer's credibility, often ensuring that the buyer is reputable and likely to fulfill the agreement. Access to Credit Limit: Companies can get a credit limit to leverage on packing credit with their purchase orders, availing advances at a concessional rate and adjusting these amounts with future inward remittances against exports.

Disadvantages of Pre-Export Finance

Financing Cost: While the financing terms are usually favorable, the interest rate can still be higher than traditional lending options. Financial Burden: In case the buyer does not remit the funds, the seller has to cover the advance amount from their own resources, which can be a significant financial burden.

Conclusion

Pre-export finance, or packing credit, is a vital tool for sellers in the export industry. It ensures that sellers have the necessary funds to produce and ship goods without unnecessary delays, all while safeguarding against potential financial risks. For more detailed information about export finance, including credit consultancy services, please contact us through our official email.