Pre-shipment and Post-shipment Finance
Pre-shipment finance includes any finance that an exporter needs before they send goods to a buyer. Once the business has a confirmed order from a buyer, which is sometimes backed by a Letter of Credit, working capital finance is often required to fund wages, production costs and buying raw materials. Exporters can access receivables backed financing, inventory/ warehouse financing and pre-payment financing.
Trade or import finance is essentially a loan where the goods exported are the security, so in the case of defaulting, the lender can seize the goods. Lenders will often fund up to 80% of the total value of the goods, but this can vary depending on the risk of exporting the goods and the lender. The goods being exported are also an important consideration for import finance lenders: if there is little demand for the goods (e.g., bespoke furniture or specialist circuits), a lender may not be able to resell in the case of commercial losses, therefore the risk is higher and they may be unwilling to finance the transaction.
Often lenders wish for goods to be kept in a trusted location or public warehouse (or in the borrower’s premises but controlled by a third party). Warehouse or inventory financing is often favourable to borrowers for short term working capital or loans (especially if they have used up existing credit lines or bank overdraft facilities), and the inventory can be used as collateral or more flexible terms.
Pre-payment financing is subtly different to import type financing – in this case, the buyer will take out a loan specifically for the purpose of paying the seller in advance of shipping the goods, and the borrowing contract states that the buyer pays the loan back to the bank once they have received payment for the goods. This process ensures quick payment and the risks are shared with the buyer and the bank.
Once an exporter has shipped goods, a financier can advance the payment so they have sufficient liquidity between shipping the goods and receiving the payment. Post-shipment finance can operate in a number of ways: through a Letter of Credit, a loan via an accounts receivables document, or via invoice factoring or Receivables Discounting (selling the invoice or receivables document – see our report on invoice finance here).
What is Supply Chain Finance?
Both large corporations and small businesses need to import or export goods as part of their end-to-end supply chain. As a result of globalisation, supply chains are constantly being lengthened as a result of competition, increased efficiency and productivity from markets, and to diversify risk (i.e., purchasing one product from many suppliers). The catch all term ‘receivables management’ which covers GSCF and asset-based lending is predicted to be worth over USD $1.3tn per year.
Global supply chain finance, (also known as GSCF or supplier finance,) is a cash flow solution which helps businesses free up working capital which is trapped in global supply chains. It is a solution designed to benefit both suppliers and buyers; suppliers get paid early and buyers can extend their payment terms. This solution allows businesses which import goods to unlock working capital as well as reduce the risk associated with buying goods in bulk and/or transporting them globally (read more about risks of supply chain finance here).