Types of Preshipment Finance Structures
To understand the various ways to finance goods before they are shipped, delve into the world of types of preshipment finance structures. This solution offers different sub-sections such as Cash in Advance, Letter of Credit (LC), Documentary Collection, Bank Guarantee, Supply Chain Financing, Forfaiting, Factoring, Pre-Export Finance, Packing Credit, and Export Credit Insurance, to cater to different financial needs and scenarios.
Cash in Advance
One of the types of pre-shipment finance structures available to exporters is payment in advance. This option requires the importer to pay for the goods before they are shipped. This ensures that the exporter receives payment before goods are dispatched, mitigating any risk of non-payment or default by the importer.
This method is beneficial for small and new businesses that lack a credit history or established relationship with their customers. However, it can act as a disadvantage for importers who must pay upfront before receiving any goods. For this reason, it may not be feasible for all exporters to insist on payment in advance.
It’s important to note that payment in advance does not provide shipment financing but only guarantees upfront payment. It’s usually suitable for low-risk goods, and if the importer defaults on payment, there isn’t much recourse the exporter has except legal action.
A prominent example of cash in advance is the Apple Corporation’s policy in which every customer needs to make full payment before having an iPhone delivered to them.
If only relationships were as secure as a Letter of Credit.
Letter of Credit (LC)
To facilitate international trade, Letter of Credit (LC) is a common Preshipment Finance Structure used to ensure payment security between the importer and exporter. The LC is a written commitment provided by a bank that guarantees payment will be made to the exporter on behalf of the importer upon the completion of specific conditions.
Below is a table highlighting further details regarding a Letter of Credit (LC):
| Letter of Credit (LC) | Details |
|---|---|
| Provides Payment Security | Ensures payment to exporter from bank if terms outlined in LC are met |
| Minimizes Commercial Risk | Reduces risk for both importer and exporter |
| Flexible Terms | Allows for negotiation between parties in determining terms and condition |
Considering the risks involved in international trade, it is essential to choose an appropriate Preshipment Finance Structure. A Letter of Credit (LC) is flexible, providing amicable solutions for both parties while safeguarding their interests.
If you want your international trades to be successful and secure, utilize Preshipment Finance Structures like LC to reduce commercial risks and gain flexibility while ensuring maximum payment security. Don’t miss out on these opportunities; incorporate these options into your business practices today!
Documentary collection might sound like a fancy art exhibit, but it’s actually just a way to get paid for your goods without any risky business.
Documentary Collection
For the financial aspect of pre-shipment, there are several options available. One of the viable methods is through a process called ‘Documentary Credit’. This type of finance structure primarily involves a bank acting as an intermediary in the transaction assuming responsibility for the payment between the exporter and importer. There are two types under this method, namely ‘Documents Against Payment’ (D/P) and ‘Documents Against Acceptance’ (D/A).
| Documentary Collection | |
|---|---|
| Description | Example |
| Type | D/P and D/A |
| Exporter Control over Goods | No |
| Risk for Exporter | Low |
| Risk for Importer | Medium |
| Cost | Low to Medium |
Furthermore, these payment methods revolve around presenting documents by either party as proof of delivery and receipt. In a D/P transaction, payment occurs after presentation of shipping documents upon delivery and inspection by the buyer’s agent or other authorized parties. Whereas in D/A transaction, payment occurs at a future date agreed upon acceptance of goods.
It is interesting to note that according to Global Trade Review, despite Covid-19 restrictions, global trade transactions using documentary credits have not suffered immensely with fewer records of defaults observed among clients engaged in international trade.
Get a Bank Guarantee, because sometimes a handshake just isn’t binding enough in the dog-eat-dog world of international trade.
Bank Guarantee
When it comes to preshipment finance structures, one option for buyers and sellers are Bank Guarantees.
This financing method involves a bank guaranteeing payment to the seller if the buyer does not fulfill their financial obligation. The guarantee acts as collateral for the transaction, ensuring that the seller will be paid even if the buyer fails to pay.
A Table can be used to showcase this financing structure. It would consist of two columns: “Buyer” and “Seller” with corresponding rows detailing each party’s responsibilities and guarantees.
In addition, it’s important to note that Bank Guarantees can come in different forms such as Bid Bonds, Payment Guarantees, Advance Payment Guarantees, and Performance Guarantees.
According to Trade Finance Global, “Bank Guarantees can be a useful tool in reducing risks associated with international trade.”
Finally, a financing option that won’t leave your supply chain feeling like a game of Jenga.
Supply Chain Financing
Through Supply Chain Financing, suppliers can access financing at lower costs compared to traditional financing options like bank loans, which often come with high-interest rates. This improves the overall financial stability of the supply chain and reduces the dependence on individual parties.
One unique feature of Supply Chain Financing is invoice factoring, where suppliers sell their invoices at a discount to a finance provider. The provider then collects the full payment from buyers after an agreed-upon period, enabling faster payment for suppliers.
In one instance, a textile supplier was struggling with cash flow due to delayed payments from a large buyer. By using Supply Chain Financing, they were able to obtain financing against their outstanding invoices and improve working capital. This allowed them to fulfill other orders and invest in new machinery to increase production capacity.
Forfaiting: Because in finance, sometimes selling your invoices is like selling your soul to the devil, but at least you get paid upfront.
Forfaiting
One of the advantages of forfaiting is that it can be used by businesses without requiring any collateral or credit enhancement. Moreover, since forfaiters typically assume all risks associated with non-payment, sellers are relieved of any obligations related to default risks of their buyers. In addition, since the financier purchases the receivables at a discounted price, the exporter can obtain instant cash flows and avoid lengthy payment cycles that come with traditional financing arrangements.
When engaging in forfaiting, it is essential to confirm all details before proceeding with such an arrangement. For example, it is crucial to verify if there are any restrictions on trade or travel in specific regions or countries and if there may be any political issues affecting regular payments. Additionally, it is advisable to work with trusted and reputable financial institutions that have experience in this type of market segment.
Factoring: When your unpaid invoices are worth more to someone else than they are to you.
Factoring
Revenue-Based Financing:
Revenue-based financing is a type of preshipment finance that involves selling a portion of your future revenue to an investor. The investor provides upfront funding, and in exchange, they receive a percentage of your company’s revenue until the agreed-upon amount is paid back.
Table:
| Aspect | Details |
|---|---|
| Type | Preshipment Finance |
| Structure | Selling future revenue |
| Investor | Pays upfront, receives revenue percentage |
| Return on Investment | Percentage of company’s revenue |
| Advantage | No need for collateral |
Unique Details:
One advantage of this method is that there is no need for collateral. Unlike traditional financing options such as bank loans or lines of credit, revenue-based financing does not require you to put up assets as security against the loan. Instead, it is based solely on the future earnings potential of your business.
Suggestions:
For businesses that are just starting out or have limited access to traditional sources of funding, revenue-based financing can be an attractive option. However, it’s important to consider the long-term impact on your business’s finances before committing to any type of preshipment finance. Make sure you have a clear and realistic plan for how you will pay back the investor while still maintaining enough cash flow to operate and grow your business. Additionally, it may be beneficial to research multiple investors and compare offers to ensure you are getting the best deal for your specific needs.
Before you export your goods, make sure your finance game is strong with pre-export finance.
Pre-Export Finance
Financing options for businesses before exporting their products is commonly known as Pre-Export Finance. This financing covers costs related to production, packaging, and transportation of goods.
Various financial institutions offer different types of pre-export financing structures that can be beneficial for businesses. These structures include export factoring, pre-export loans, letters of credit, and documentary collection.
Export factoring allows businesses to sell their accounts receivable to a factor at a discounted rate and receive immediate cash payment. Pre-export loans provide the necessary funds to produce and package goods before exportation. Letters of credit guarantee payment from the importer to the exporter. Documentary collections involve banks mediating payments between exporters and importers.
It is important for businesses to evaluate which pre-export finance structure best aligns with their goals and needs.
Pro Tip: Prioritize finding a pre-export finance structure that takes into account both the growth potential of your business and the risk involved in exporting goods to ensure long-term success.
Packing credit: Because nothing says ‘I trust you’ like giving someone a loan to pack their goods before shipment.
Packing Credit
The finance structure that allows exporters to obtain credit from banks based on their pre-shipment is commonly known as Packing Credit. This type of financing covers expenses incurred from the point of receiving an export order to the packing of goods and transportation.
Packing Credit is a crucial tool for exporters, allowing them to bridge the working capital gap between manufacturing and export delivery. The credit facility provides financing for various activities, including raw material purchases, processing, and packaging expenses.
Moreover, this type of finance is critical in cases where the exporter does not receive immediate payment for their exports. Banks usually offer Packing Credit with a maturity period of up to 180 days or even longer in some cases.
It’s worth noting that Packing Credit attracts interest rates of around 5-7%, which varies depending on the bank’s policy and country. According to research by Trade Finance Global, India-based Exim Bank has been offering this type of finance to Indian exporters at a rate of around 3.8-4%.
Export credit insurance: because sometimes even the most reliable customers need a little extra reassurance.
Export Credit Insurance
For the protection of exporters against the risk of non-payment by foreign buyers, a method called ‘Coverage for International Credit Transactions’ is used. It goes by the name of Export Credit Insurance.
A sample table for Export Credit Insurance can be created to show relevant data:
| Insured Parties | Policy Period | Covered Risks | Premium Rates |
|—————-|————–|—————|—————|
| Exporters | 1 year to 5 years | Political Risk, Commercial Risk, Exchange Rate Fluctuation | 1% to 3.5% of insured value |
One noteworthy advantage of Export Credit Insurance is the enhancement of an exporter’s credit standing in front of financial institutions and enabling them to acquire more favorable financing options. Once an exporter had shipped goods worth $500,000 to a buyer on open account terms but received no payment due to political turmoil in the buyer’s country. Fortunately, they had opted for Export Credit Insurance and received compensation from their insurer for their loss.
Frequently Asked Questions
1. What are the different types of preshipment finance structures available to exporters?
There are several types of preshipment finance structures available to exporters, including packing credit, pre-export finance, advances against export incentives, factoring, and forfeiting.
2. What is packing credit in preshipment finance?
Packing credit is a type of preshipment finance provided by banks to exporters to finance the purchase, processing, and packing of goods before shipment. It is typically a short-term loan that is repaid from the export proceeds.
3. What is pre-export finance in preshipment finance?
Pre-export finance is a type of preshipment finance designed to provide funding to exporters to meet their working capital needs during the production and procurement of goods for export. It helps exporters to manage their cash flow and reduce the risk of non-payment.
4. What are advances against export incentives in preshipment finance?
Advances against export incentives are a type of preshipment finance that allows exporters to finance their working capital by availing advances against export incentives such as duty drawback, DEPB, and duty-free replenishment certificate.
5. What is factoring in preshipment finance?
Factoring is a type of preshipment finance in which a factor buys the exporter’s accounts receivable and provides immediate cash to the exporter. It helps exporters to manage their cash flow and reduce the risk of non-payment.
6. What is forfeiting in preshipment finance?
Forfeiting is a type of preshipment finance in which an exporter sells its receivables arising from exports to a forfeiting company at a discount. It helps exporters to obtain immediate cash and reduce the risk of non-payment.
