An export order brings in a sale, but it also sets several expenses in motion. Suppliers need to be paid, production costs need to be covered, packaging arranged, and shipping expenses met, while payment from the overseas buyer follows its own timeline. Even with a confirmed purchase order, a substantial amount of working capital can remain tied up until the shipment is paid for.
When new orders arrive before earlier payments come in, exporters have to fund fresh production while waiting for money from previous shipments. For Indian manufacturers and suppliers, export finance from banks can help bridge this gap. Pre-shipment credit provides funds for eligible expenses before goods are dispatched, while post-shipment credit helps cover the period between dispatch and payment from the overseas buyer. These two facilities address different stages of an export order, helping exporters meet expenses without placing the entire burden on their existing funds.
The Export Funding Gap: Where Cash Gets Tied Up
Selling to overseas buyers comes with payment timelines that can be quite different from domestic sales. Goods need time to reach their destination and clear customs, while payment depends on the terms agreed with the buyer. These can include a Letter of Credit (LC) or Documents Against Acceptance (DA).
For an exporter, expenses begin well before the buyer’s payment arrives. Raw materials, production wages, packaging and freight all need funding during the order cycle. After dispatch, the wait for payment can keep a substantial share of working capital tied up in goods that have already left the factory.
This creates two distinct funding needs: one while the goods are being produced and another after they have been shipped. Pre-shipment and post-shipment credit address these stages, helping exporters meet expenses while waiting for the proceeds of their sales.
Pre-Shipment Credit: Funding Production Before Dispatch
Pre-shipment finance, also known as export packing credit, helps Indian exporters cover the costs of fulfilling an export order before the goods leave the country. Banks offer this facility against an export order or Letter of Credit, subject to their lending conditions.
How Pre-Shipment Finance Works for Exporters
Banks can provide pre-shipment credit in Indian Rupees or foreign currency through a facility known as Pre-Shipment Credit in Foreign Currency (PCFC). The approved amount depends on the bank’s assessment of the export order, the funding needed, and the margin applicable to the facility.
The funds can cover expenses such as:
- Purchasing raw materials and components from suppliers.
- Paying for labour, processing and assembly.
- Arranging export packaging, warehousing and transport to the port.
- Meeting eligible inspection fees and other costs involved in preparing goods for shipment.
After the goods are shipped, the pre-shipment credit is generally repaid using the export proceeds. Depending on the arrangement with the bank, it can also be converted into post-shipment credit, giving the exporter access to funding while waiting for the overseas buyer’s payment.
Post-Shipment Credit: Accessing Funds After Dispatch
Once the goods have been shipped, the exporter’s next step is to collect payment from the overseas buyer. Depending on the agreed payment terms, this can involve waiting until the bill falls due. Post-shipment finance allows exporters to seek funds against their export bills instead of waiting for the payment to arrive.
How Post-Shipment Finance Works
After dispatch, the exporter submits the required shipping and export documents to the bank. These can include the commercial invoice, bill of lading or airway bill, packing list, and export bill, depending on the transaction and payment terms. The bank reviews the documents and, if the exporter meets its lending conditions, provides credit against the eligible export receivables.
Banks offer post-shipment credit through different arrangements, depending on the export transaction.
- Export Bill Discounting: The bank advances funds against an eligible export bill, deducting applicable charges and interest. The buyer’s payment is collected when the bill falls due.
- Negotiation of Export Documents: For shipments backed by a Letter of Credit (LC), the bank examines the documents against the LC terms and can release funds if the documents comply and the transaction qualifies under the Bank’s conditions.
- Advances Against Export Bills Sent for Collection: When export bills are sent to the overseas buyer or bank for collection, the exporter can seek an advance against eligible bills, subject to the bank’s terms.
The export proceeds are generally used to repay the post-shipment credit. This gives exporters access to funds from completed shipments while they wait for payment, helping them meet upcoming expenses and finance new orders.
Pre-Shipment vs. Post-Shipment Credit: Key Differences
Each facility serves a different stage of an export transaction, and the differences go beyond when the funds are accessed. Here’s how they compare across the key features.
3 Ways to Manage Pre-Shipment Credit Better
The cost of export credit depends on more than the approved interest rate. How much you borrow, when you draw the funds and the facility you choose can all affect the total cost.
Compare INR Credit with PCFC
If your export order is invoiced in USD, EUR or GBP, compare a rupee-based packing credit facility with Pre-Shipment Credit in Foreign Currency (PCFC). Foreign currency credit can offer a lower interest rate in some cases, but the total cost depends on the bank’s rates, charges, and applicable terms. Also consider the currency in which you will receive payment before choosing a facility.
Draw Funds as Production Progresses
Instead of drawing the entire approved amount at the start, plan withdrawals around your production needs. You could draw funds for raw materials first, followed by manufacturing, packaging, and other eligible expenses as the order progresses. This helps limit the period for which borrowed funds remain unused and can reduce interest costs.
Build a Strong Credit Profile
Banks assess several factors when deciding the amount and terms of export credit, including the export order, financial position and repayment record of the applicant. Keeping financial statements, tax filings and order documents complete and up to date can support the assessment. Collateral requirements depend on the bank’s lending policy and the facility offered, so a strong credit profile does not automatically guarantee a collateral-free limit.
What Banks Look For Before Approving
The details behind an export order can shape how a bank assesses a credit application. The lender needs to evaluate the transaction, the exporter’s ability to repay, and any outstanding export proceeds before deciding the terms of the facility. Four areas can influence that assessment.
Export Order and Buyer Details
The order value, payment terms, and overseas buyer’s details help the bank assess the transaction for which credit is being requested. Where a Letter of Credit (LC) is involved, the bank also considers its terms and the issuing bank’s details as part of its review.
Financial Position and Repayment History
The lender examines the exporter’s financial statements, existing borrowing, and repayment record to assess the business’s financial position. These details help the bank judge the credit limit it can offer and the terms attached to it.
Outstanding Export Bills
Unsettled export proceeds can prompt closer scrutiny, particularly when earlier payments are overdue. Banks can review relevant records in the Export Data Processing and Monitoring System (EDPMS) to check the status of export transactions and identify unresolved entries.
Supporting Financial and Tax Records
Financial statements, GST returns, and other records requested by the bank help support the figures in the application. The documents required depend on the lender and the type of facility. Any gaps or inconsistencies in the submitted records can lead to further questions during the review.
Financing an Export Order from Start to Finish
An export order has financial demands at both ends, from sourcing materials and getting production underway to waiting for the buyer’s payment after dispatch. Pre-shipment and post-shipment credit address these two stages, giving exporters different ways to fund the order as it progresses. Knowing when each facility fits, and what it costs to borrow, helps businesses plan export transactions around their available funds and cash flow needs.
