Pre export finance

Pre export finance

Pre-export finance is the finance required by an exporter before the shipment of goods. Pre-export finance provides the exporter with working capital required for funding of wages, production cost, buying raw materials, processing and converting into finished goods and packaging. Pre-export credit is extended under the concessional rates of interest at 7.5 per cent, to a maximum period of six months.

This type of export trade finance is provided to the exporter when a certain amount of money is needed for the manufacturing or production of raw materials for exporting. This finance is needed for processing raw material into finished goods. Once the processing is done, they have to be stored at relevant places and for that some cost has to be paid. Apart from this cost for packing and shipment of goods to the port has to be paid for which certain amount of finance is needed. Exporter can apply for this finance once order is confirmed by the buyer and the proof of confirmed order has to be shown in the finance institution for further processing. It is granted for 180 days.  If some kind of uncertainty occurs then this can be extended to 90 days. Maximum allowable period is 270 days. 

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-shipment finance.The banks grant pre-shipment credits under the concessional rates of interest at 7.5 per cent and it can extend to a maximum period of six months.Pre-shipment finance is accessible by the exporters through receivable-backed financing, inventory/warehouse financing and pre-payment financing.

Pre-export 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-export financing ensures quick payment, the risk of losses in such finance is only shared by the buyer and the lender.

Benefits of Pre-export finance

• 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-shipment inspection charges
• Purchase of heavy machinery and other capital goods from domestic market, for the production of export goods
• Meeting expenses of processing goods

A pre-export finance is quite different from other finance products and services; such as corporate loans provided against the balance sheet of the borrower.In a pre-export finance funds are usually provided directly from the finance provider to the producers; for effectively assisting with the working capital requirements of the business organizations. Using this pre-export finance supplier can purchase raw materials along with bearing processing costs, storage costs as well as transportation. Typically, a pre-export finance comes with a repayment tenor of 1 to 5 years.