For an exporter, there’s a major challenge characterized by the “waiting period,” which is the difference between exporting goods to the overseas buyer and waiting for the payment. It directly affects their working capital needs. Now, waiting to receive the funds is the last thing any businessman should do. Well, trade finance is an effective way out!
Trade finance is an umbrella term for multiple financial solutions available to exporters and importers to facilitate seamless trade. Out of all the other options, post-shipment credit is one of the most popular among exporters.
In the blog, we will talk about all that an exporter needs to know about post-shipment credit.
Post-shipment credit is a short-term loan for exporters, provided after shipping goods but before receiving payment.
Post-shipment credit is beneficial for exporters as it provides quick financial relief, efficient cash conversion, enhances customer value, requires no collateral, and involves less risk.
Sources to get post-shipment credit include banks, Exim Bank, and Non-Banking Financial Corporations (NBFCs).
Any legal business involved in export of goods is eligible for post-shipment credit.
What Is Post Shipment Credit?
As per the Reserve Bank of India:
“Post Shipment Credit is any loan or advance granted or any other credit provided by a bank to an exporter of goods/services from India from the date of extending credit after shipment of goods/rendering of services to the date of realization of export proceeds and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the government from time to time.”
In simpler words,
Post-shipment credit is a type of short-term loan or financial solution that is available to a seller or exporter after they have shipped all the goods to the buyer and before they receive the payment. It’s an effective financial solution available to the sellers with their cash stuck in the entire process of shipping goods and receiving the final payment.
Importance of Post-Shipment Credit For Exporters
Post-shipment credit is extremely important for exporters, both directly and indirectly. Here’s why:
Quick Financial Relief: The cash flow problem that is faced by the exporters during the “waiting period” is resolved almost immediately with the help of post-shipment credit to continue with other major business operations.
Efficient Cash Conversion: Exporters get the freedom to turn their account receivables into cash. It helps them be more flexible with buyers from outside their country.
Improved Customer Value: This adaptability increases Customer Lifetime Value and opens the way for long-term business expansion.
No Collateral Needed: Yes, no collateral is required to get post-shipment credit, making it ideal for even small scale businesses.
Lesser Risk: Exporters are able to raise money without having to worry about losing their assets, which is a common worry for many companies.
Types of Post-Shipment Credit
There are so many options for post-shipment credit available to the exporters as per their needs and preferences:
Advance Against A Bill Of Collection
This is a type of post-shipment credit that is advanced when a foreign buyer buys goods from an exporter and the exporter asks its bank to collect the payment on their behalf. The bank then provides a portion of the payment that is expected to the exporter as a loan.
Finance Against Export on a Consignment Basis
Sometimes, it happens that the exporters don’t get paid right away after they have shipped the goods to the overseas buyer. It could be a case that the buyer pays after the goods have been sold. Here, this type of post-shipment finance comes to the rescue.
The exporter can get a loan or financial help from their bank based on the money they expect to get from selling those goods through the overseas agent.
Advance Against Claims of Duty Drawback
This is the type of post-shipment credit that an expert gets if he’s eligible for a refund of certain export duties paid. In this case, the bank advances them funds based on the estimated amount of the refund they will receive.
Finance Against Undrawn Balances
In scenarios where the exporter has not used the full credit limit given by the bank or where some invoices are still not paid, the bank can provide finance against the unused or undrawn portion of the credit.
Purchased Export Bills
During the export and import of goods and services, exporters often get a promissory note of payment from the buyer. The exporter can use such notes to get an advance from the bank, but at a discounted rate. The bank gets a discounted amount of the full payment to be received by the buyer right away. The bank now collects the full amount from the buyer when the bill matures.
Discounted Export Bills
In this type of post-shipment credit, the bank discounts the exporter’s bills, giving them instant cash at a discounted value, and then collects the full payment from the buyer when the bill is due, similar to purchased export bills.
Negotiated Export Bills
When the exporter has the promise of payment from the buyer, they can reach out to the bank to sell those payment terms, thus receiving the full amount in advance minus the fees and interest charged by the bank. Now, the responsibility of collecting payment from the buyer shifts to the bank.
Sources of Post-Shipment Financing for Exporters
Exporters can get post-shipment credit funding from three main sources, as discussed below:
Banks: There are multiple banks, like nationalized, foreign, rural, private, cooperative, etc., that provide such financial services to exporters.
Export-Import Bank Of India: A government-owned financial entity called the Exim Bank has the authority to grant money to business owners in exchange for exported goods.
Non-Banking Financial Corporations (NBFCs): Financial service providers who are not banks have also increased their assistance for exports. They offer assistance with things like lowering invoicing costs and obtaining funding for regular business needs.
Three Different Forms of Post-Shipment Finance For Exporters
Post-shipment finance for exporters comes in three different forms:
1. Physical Export
Credit goes directly to the exporter named in the trade documents.
2. Capital Goods and Project Export
Funds are allocated to the foreign importer but disbursed to the domestic exporter.
3. Deemed Export
Finance is provided to the supplier of goods and services, sent to designated agencies.
Who All Are Eligible For Post-Shipment Credit?
All kinds of exporters are eligible for post-shipment credit including:
Market and manufacturing exporters
Export and trading houses
Manufacturers who supply merchant exporters
Both individuals and companies
Any legal business involved in export of goods can avail this financial facility.
Documents Required To Avail Post-Shipment Credit?
To get post-shipment credit, you are expected to present the documents listed below. It also depends on what source you are trying to use to avail yourself of this facility.
Bill of lading/airway bill
Certificate of origin
Import Export Code (IEC) certificate
Other than these documents, it also depends on what type of post-shipment credit you are taking.
Credlix and Post-Shipment Credit
With its expertise in assisting exporters with post-shipment credit solutions, Credlix makes it simple for them to obtain short-term finance after their goods have been delivered. Exporters are given the tools they need by our experience to efficiently manage cash flow, which fosters the company’s growth.
Post-shipment credit plays a very important role in providing the much-needed help to exporters, which strengthens them to navigate the complexities of international trade with confidence and efficiency. Credlix, with its specialized expertise, stands as a reliable partner, simplifying the process of obtaining post-shipment credit and empowering businesses to manage their cash flow effectively for sustained growth.