10 Difference Between Pre-Shipment and Post-Shipment Finance (With Table)

What is the main difference between pre-shipment and post-shipment finance? The former provide financial assistance to exporters in order to export their products while the latter provide financial assistance to exporters against the shipment of goods which is already done.

Buying and selling commodities is an ongoing process across the world. Some people require essential and non-essential products to enhance everyday survival. The trade require financial commitment before taking place.

Pre-shipment and post-shipment financing are two vital stages of financing that favor exporters. I wrote this blog post to provide a detailed insights into the difference between pre-shipment finance and post-shipment finance.

10 Difference Between Pre-Shipment and Post-Shipment Finance (With Table)

Difference Between Pre-Shipment and Post-Shipment Finance With Table

Basic Terms Pre-Shipment Finance Post-Shipment Finance
Meaning Financial assistance to exporters of goods before the shipment. Financial assistance to exporters against the shipment of goods already done.
Usage Purchase of raw materials, producing end-to-end products, and packaging. Helps to pay suppliers and avoid awaiting for the payment to be received by the seller.
Interest Percentage 0.075 0.0865
Documents Required Export Orders Export Shipping Documents
Repayment Conditions Depends on the proceeds of the Contract. Depends on the proceeds of Exports.
Risk Involved Payment and performance risk Payment risk only
Eligibility Export company or company exporting goods through export houses. Exporter himself or the person in whose name export documents are transferred.
Objective To help the exporters to procure raw material, labor and supplies. To finance export receivables right from the date documents are submitted to the exporter’s bank till the date of realization of proceeds from exported goods.
Duration Longer Shorter
Pay-out Ratio No specific formula Up to 90% of the invoice value of goods exported.

What Is Pre-Shipment Finance?

Pre-shipment finance is a specialized form of business financing that supports the crucial phase of a trade transaction. The period between the receipt of an export order and the actual shipment of goods.

It provides funding to exporters to cover expenses incurred in the production, packaging, and preparation of goods before they are shipped to the buyer.

This financial instrument assists exporters in overcoming the cash flow gap that arises due to the time lag between production completion and payment receipt.

Pre-shipment finance can take various forms, including loans, advances, or credit facilities, and is typically collateralized by the goods themselves or the export order.

This type of financing is particularly valuable for small and medium-sized enterprises (SMEs) that might struggle with working capital constraints.

By availing pre-shipment finance, exporters can fulfill orders on time, maintain quality production, and establish credibility with international buyers.

It ultimately contributes to the smooth execution of global trade transactions and the growth of international commerce.

What Is Post-Shipment Finance?

Post-shipment finance refers to a specialized financial arrangement designed to support businesses after the shipment of goods to international buyers. This form of financing addresses the gap between shipment and payment receipt.

Once goods are dispatched and the relevant shipping documents are submitted to the financial institution, exporters can access post-shipment finance. This funding assists in bridging the time gap between the delivery of goods and the actual receipt of payment from the overseas buyer.

It allows businesses to cover various expenses such as production costs, operational overheads, and repayment of pre-shipment financing. Post-shipment finance can be structured as loans, advances, or discounting of export bills.

It plays a critical role in facilitating smooth cash flow, reducing financial stress, and ensuring the continuation of trade operations without interruption. This form of financing is particularly vital for businesses engaged in international trade.

Main Difference Between Pre-Shipment and Post-Shipment Finance

  1. Pre-shipment finance is obtained before goods are shipped while Post-shipment finance is obtained after goods have been shipped.
  2. Pre-shipment finance covers expenses related to production and preparation of goods for export while Post-shipment finance covers the gap between shipment and payment receipt.
  3. Pre-shipment finance is collateralized by the export order and the goods themselves while Post-shipment finance is backed by shipping documents and evidence of the completed shipment.
  4. Pre-shipment finance is accessible prior to shipping through credit facilities or advances while Post-shipment finance is available after shipment through loans, export bill discounting, or advances.
  5. Pre-shipment finance focuses on working capital needs during the production phase while Post-shipment finance focuses on managing cash flow after goods are dispatched and while awaiting payment.

Similarities Between Pre-Shipment and Post-Shipment Finance

  1. Both types of finance are designed to support businesses engaged in international trade.
  2. Both provide funding solutions to bridge financial gaps during different stages of the export process.
  3. Both help exporters manage cash flow challenges associated with the export cycle.
  4. Both forms of financing reduce the financial risks faced by exporters due to payment delays or uncertainties.
  5. Both require the involvement of banks or financial institutions to provide the necessary funds and services.

Final Thoughts from Experts

The distinction between pre-shipment and post-shipment finance is pivotal in understanding how these financial instruments cater to the diverse needs of exporters in the complex realm of international trade.

Pre-shipment finance operates at the inception of the export process, offering funding to cover expenses associated with the production, packaging, and preparation of goods before they are dispatched.

Post-shipment finance comes into play after the goods have been shipped and focuses on managing the crucial period between shipment and actual payment receipt. It aids exporters in bridging the gap between these stages, ensuring that operational expenses and financial obligations are met.

These differences emphasize the complementary roles of pre-shipment and post-shipment finance. Pre-shipment finance is instrumental in enabling exporters to meet production and order fulfillment obligations, while post-shipment finance safeguards against cash flow disruptions during the critical time between shipment and payment realization.

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