Pre-export Finance

Pre-export Finance

Trade finance

Trade finance personifies financing for trade. It is a specialist finance that can help a company to grow and increase trade. Global trade finance helps business in releasing working capital from domestic trade transactions. 

Export process is lengthy, cumbersome and expensive and involves certain risks too. Moreover, payment terms can be long and very hard to manage. Even after careful time planning and financial management, exporting commodities can place incredible strain on your business. International trade finance thus becomes a key factor in the competition among various business. 

Export Finance

Export trade finance helps exporters in getting finance for various trade relatedactivities. It is for assisting the traders who are willing to sell goods to internationalbuyers. It results in increased sales of the customers, and availing more profit fromthose sales. Export finance helps exporters to get finance for the pre shipment andpost shipment activities so that all the tasks can be performed smoothly even beforegetting paid from the importer.

   

Pre-export finance

After the confirmation of an order by the buyer, mostly through a Letter of Credit, exporters often need working capital finance to fund wages, production cost, buying raw materials, processing and converting into finished goods and packaging. The finance required by an exporter, prior to the shipment of goods, is defined as pre-export finance. 

The banks grant pre-export credits under the concessional rates of interest at 7.5 per cent and it can extend to a maximum period of six months.

Pre-export finance is accessible by the exporters through receivable-backed financing, inventory/warehouse financing and pre-payment financing.

A loan provided by a lender with the goods exported essentially considered as security is called the trade or import finance – wherein the lender can seize the goods in case of defaulting. While the funds provided by the lender can go up to 80% of the total value of the goods, factors like the risk of exporting, the goods being exported and the lender plays a major role on the amount of the allocated loan. In case of goods with little demand, lenders often shy off to finance, since there are higher risks – as during commercial losses the goods might not get re-sold.

Inventory or warehouse financing is often preferable since lenders might demand for the exported goods to be kept in a trusted location or public warehouse or borrower’s premises under the control of a third party. It is also favourable for the borrowers for short term working capital or loans, since they can use the inventory as collateral or flexible terms when they have used up existing credit lines of bank overdraft facilities.

Pre-payment financing is the buyer taking out a loan specifically to pay the seller in advance of the shipment of the goods. According to the borrowing contract, the buyer is liable to pay the loan back to the bank soon after receiving payment of the goods. While pre-payment financing ensures quick payment, the risk of losses in such finance is only shared by the buyer and the lender.

Pre export finance is majorly beneficial in:

·         Purchasing of raw materials to manufacture goods

·         Storage of goods in proper warehouse till shipment

·         Payment for packing, marketing and labelling of goods

·         Payment for pre-export inspection charges

·         Purchase of heavy machinery and other capital goods from domestic market, for the production of export goods

·         Meeting expenses of processing goods

Types of Pre-export Finance

Following below are some special schemes available in respect of pre-export finance:

Extended Packing Credit Loan: it is a type of loan which is given only to those exporters who has a rating of first-class exporters given by the commercial banks on the basis of their creditworthiness. It is basically granted for making advance payment to the suppliers in order to acquire goods that are to be exported. These types of advances are considered as clean advances as it does not include any documentary evidence for a short period of time. 

Packing Credit Loan (Hypothecation):  it is basically provided to the exporters in order to acquire the raw materials, work-in-process or finished goods that are meant for exports. These goods are then treated as security for sanctioning of loan. Under this facility, it is mandatory for the exporter to provide a hypothecation deed in favour of the bank, till the time the possession of goods is in the hands of the exporter.

Packing Credit Loan (Pledge): this loan is given to those exporters who gets the duty to acquire seasonal raw materials or materials which are packed up in odd or brunched lots. The documents relating to raw materials are kept in safety with the bank until the possession remains with the exporter.

Secured Shipping Loan: Secured shipping loan can only be obtained after the goods are handed over to the transporter or the agent who is responsible for clearing and forwarding of shipment. It is either released against lorry receipt or railway receipt. It is provided for a very short period of time, only until the goods are dispatched to the port and completion of shipping and customs formalities is done.