Understanding Pre-Export Finance: A Comprehensive Guide for Exporters

Export finance is an integral part of international trade, ensuring both buyers and sellers are protected during the transaction. The two main types of export finance are pre-shipment finance and post-shipment finance. This article focuses on pre-shipment finance, specifically how pre-export finance works and its benefits.

What is Pre-Export Finance?

Pre-shipment finance, often referred to as pre-export finance, is a financial service provided to exporters before the actual shipment of goods. This type of finance is especially beneficial for companies that require immediate access to funds to meet their working capital needs while ensuring payment terms are established.

How Does Pre-Export Finance Work?

Let's consider an example. Company A, an exporter, wants to sell its goods to Company B, an importer, located in a different country. This is a new business relationship for both companies. Company A, as the seller, needs assurance of payment, while Company B, as the buyer, needs assurance of quality. Moreover, Company A requires immediate funds to cover its business working capital requirements.

Company A can issue a confirmed export order in favor of Company B or request a letter of credit (LC) from Company B with terms and conditions that are acceptable to both parties. Once the export order or LC is in place, Company A can then request the funds from a credit institution. The bank will provide the required credit to Company A, keeping a margin along with interest. This credit will be repaid upon the receipt of funds from Company B after the goods are shipped.

The Advantages for Exporters

Immediate Availability of Funds: Exporters can access funds immediately before the actual shipment, allowing them to meet their working capital requirements promptly.

Reduced Risk: The credit institution verifies the credibility of the buyers, providing an additional layer of security for the exporter.

Disadvantages for Exporters

Risk of Non-Receipt of Funds: If the importer does not remit the funds, the exporter has to cover the advance amount from its own sources.

Getting a Credit Limit for Pre-Export Finance

To secure pre-export finance through packing credit, it is crucial for exporters to obtain a credit limit on their purchase orders. This credit limit allows for advances at a concessional rate of interest, which will be adjusted against the inward remittance from the buyer upon shipment.

For more information on export finance and to explore the range of credit consultancy services our firm offers, please contact us through official mail. We are committed to providing comprehensive support to firms and companies navigating the complexities of international trade.