Pre Shipment and Post Shipment Finance
Why does a small business actually use trade finance? We can categorise trade-financing options into: pre-shipment finance, post-shipment finance and supply chain finance (SCF).
Pre-shipment finance includes any finance that an exporter can access before they send goods to a buyer.
Once the business receives a confirmed order from a buyer, it has an obligation to deliver the finished goods. This may involve manufacturing or procurement, and working capital finance is often required to fund wages, production costs and buying raw materials.
Exporters can access different types of working capital finance.
Trade & Receivables Finance: Trade finance (or import/export finance) is essentially a loan, where the goods exported are the main form of security/collateral. In the case of a default, 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 lender and the risks involved with exporting the goods. For example, if there is low demand for the goods (bespoke furniture, specialist circuits, etc) or a short shelf life (perishable fruit, vegetables, etc), a lender may not be able to resell them. Therefore, the risk to the lender is higher and they may only be willing to finance a small percentage of the value.
Inventory or Warehouse Finance: Often lenders require the finished goods to be kept in a warehouse or other secure location (or on the borrower’s premises but controlled by a third party). The inventory can then be used by the business as collateral. A lender will provide short term working capital or loans against the collateral (minus a percentage of its value). Warehouse or inventory financing is often used to top-up existing credit lines.
Pre-payment Finance: Pre-payment finance is subtly different to trade finance (or import finance). In this case, the buyer will take out a loan specifically for the purpose of paying the seller, in advance of the goods being shipped. The finance contract usually states that the buyer will pay back the loan once the goods have been received and sold on. This process ensures quick re-payment and allows a lender to clearly link their funding to the trade cycles.
Diagram – Pre-shipment finance
Post-shipment finance includes any finance that an exporter can access after they send goods to a buyer.
Without fiance, the exporter would wait for the goods to arrive, an invoice to be raised and the payment terms period (typically 30, 60 or 90 additional days).
A financier can accelerate the payment to the exporter, so that payment is received as the goods are sent (typically loaded onto the ship).
Post-shipment finance can operate in a number of ways, through:
- A Letter of Credit (LC)
- A Trade Loan
- Invoice Factoring or Receivables Discounting: selling the invoice or receivables document
What is Supply Chain Finance (SCF)?
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 have become increasingly complex. They are also regularly being extended as a result of competition, increased efficiency, and for risk diversification (i.e. purchasing one product from many suppliers).
Supply Chain Finance (SCF, also known as Global SCF, GSCF or supplier finance) is a cash flow solution which helps businesses to free up working capital, which is trapped in global supply chains.
This benefits both suppliers and buyers; suppliers get paid early and buyers can extend their payment terms.
SCF also allows businesses which import goods to reduce the risks within the supply chain and improves relationships between suppliers and buyers (read more about risks of supply chain finance here).
Supply Chain Finance – Diagram
Trade Finance Hub
1 | Introduction and the benefits
2 | Types of trade financing
3 | Methods of payment
4 | Pre and post-shipment finance
5 | Risks and challenges
6 | Trade and export finance providers
7 | The credit process and securing finance