Post-shipment Finance | Trade Samaritan

Post-shipment Finance

The relationship of Trade finance with Cross border trade is like that of an oil with the engine. Trade finance is a major driver of international trade and banks/financial institutions play the most important role in facilitating trade finance.

Post-shipment finance refers to an advance or a loan extended to the exporter after the goods have been shipped to the importer. Receivable finance is a mere discounting of a commercial invoice and is popular in both domestic as well as cross border trade whereas under post-shipment finance transaction the bank providing the facility calls for a full of set documents including the transport document (as a proof of shipment), commercial invoice, Letter of credit and draft (as applicable). Post shipment finance is more popular in cross border trade transactions. The bank (exporter’s bank) dispatching export documents to the importer’s bank is usually the one that extends post-shipment finance to its exporter customers. Post-shipment finance can be extended with recourse or without recourse. Under without recourse, the advance is granted on the basis of funded (collateral) or non-funded limits/pre-approved credit lines. Banks also have their internal as well as due diligence procedures and may find it appropriate to extend this particular facility to their own export customers only. Post-shipment finance supports the supply chain of the exporters and its advantages are quite similar to that of pre-shipment finance.

Today most suppliers choose post shipment finance facility from their bank or financial institution as it enables them to extend better payment terms to their existing buyers and attract new buyers.

Besides the shipment of goods, post shipment export finance process flow is similar to that of pre-shipment finance. Let us diagrammatically  understand a post shipment finance transaction for an under LC export bill.

Post shipment finance process flow

 

It is interesting to know that the risk borne by the bank varies depending on the nature of the export transaction and the documentation.

For example, the transaction could be under Letter of credit (LC) or non LC; again if the transaction is under LC then the documents presented by the exporter could be clean or discrepant. We have already discussed in our earlier sections that export proceeds/payment is guaranteed in case of a clean presentation or an accepted discrepant presentation.

Let us therefore discuss the types of post-shipment finance and understand the nuances.

  1. Export bill negotiation
  2. Export bill discounted
  3. Advance against banker’s acceptance
  4. Advance against export bill sent on collection
  5. Advance against export bill sent on consignment

Export bill negotiation

Export bill negotiation is also known as ‘clean’ bill negotiation. If the documents presented by the exporter/beneficiary conform to the LC terms, exporter’s bank or the confirming bank can negotiate the bill upfront and provide an advance to the exporter. This advance may range from 80%-100% of the invoice value.  Export bill negotiation is a without recourse facility as in this case the issuing bank will make the payment at sight/due date. The scrutiny conducted at the exporter’s bank’s end is critical here as the financing is based on the assumption that the payment from the issuing bank is guaranteed. We do come across certain instances where export documents are declared ‘clean’ (conforming to the LC terms) at the exporter bank’s counter and discrepant at the issuing bank’s counter. It is equally important to check the credit rating and the standing of the issuing bank before negotiating the bill. The issuing bank should be capable of meeting its LC commitment.

Export bill discounted

Financing extended in case of a non-LC bill is termed as export bill discounted or purchased. This type of financing is extended against the limit or the credit lines sanctioned to the exporter. Banks also conduct basic checks on the underlying export documents. This financing is with recourse, which means that if the payment is not received on the due date the loan will be liquidated by debiting exporter’s account.

Advance against banker’s acceptance

Technically speaking, a bankers’ acceptance is created when a time draft drawn on a bank, usually to finance the shipment or temporary storage of goods, is stamped “accepted” by the bank. By accepting the draft, the bank makes an unconditional promise to pay the holder of the draft a stated amount at a specified date. Advance against banker’s acceptance is a very convenient and relatively secured method of trade finance.

Banker’s acceptance can be received and utilized to extend finance to exporters for both LC and non-LC transactions. Let us look at the working of both the scenarios.

LC transaction: Payment of a discrepant export bill under LC is guaranteed if duly accepted by the issuing bank. The exporters who do not enjoy sanctioned limits or are falling short of limits can request for a without recourse post-shipment finance from their banks. Upon receipt of acceptance, exporters may even request their financing bank to release or reverse the blocked limits.

Non-LC transaction: Banker’s acceptance can be obtained for non-LC transactions on the basis of special arrangement between the exporter and the importer bank. The further treatment in this case is similar to banker’s acceptance in LC cases.

There is a third scenario under this category which works on the concept of ‘pre-acceptance’. In pre-acceptance the exporter’s bank scrutinizes the under LC documents and communicates the discrepancies to the issuing bank, please note that this is done prior to the dispatch of the documents. If the issuing bank chooses to accept the discrepancies at this stage basis its communication with the importer, it communicates such an acceptance to the exporter bank. Exporter bank then extends a without recourse post-shipment finance facility to the exporter and dispatches the export bill to the issuing bank. It is important for both the banks to examine each other’s standing and commitment fulfilling capacity. Pre-acceptance can be obtained for non-LC transactions as well.

It must be noted that the scrutiny and validity of an accepted time draft is of prime importance in this type of export finance. Time draft can be presented in the court of law for handling the disputed cases.

Advance against export bill sent on collection

If the bill or the documents presented under the LC has discrepancies which the exporter does not wish to rectify, the exporter may choose to dispatch the documents outside the scope of LC, i.e. merely for collection of proceeds. Exporters ho enjoy sanctioned limits or credit line with the banks can request the bank to provide post shipment finance against these limits. This type of finance is similar to non-LC finance and is granted by the banks with recourse.

Advance against export on consignment basis

Consignment in international trade is a variation of the open account method of payment in which payment is sent to the exporter only after the goods have been sold by the foreign distributor to the end customer. An international consignment transaction is based on a contractual arrangement in which the foreign distributor receives, manages, and sells the goods for the exporter who retains title to the goods until they are sold. Payment to the exporter is required only for those items sold. Consignment sale is risky compared to a regular under LC sale.

Banks may exercise their internal policies in order to mitigate the risk. Banks may choose to finance when the goods are exported on consignment basis at the risk of the exporter for sale and eventual payment of sale proceeds to him by the consignee (with recourse). Banks usually instruct the overseas banks to deliver the document only against trust receipt /undertaking to deliver the sale proceeds by specified date, which should be within the prescribed date.

Trade finance offerings/products continue to be the most prominent and core products in the banks and financial institutions. While post shipment finance/advance products enlisted above are widely offered by the banks around the world, there are some more or modified versions of country specific post financing methods. These methods largely depend on the local regulations or are designed for financing domestic trade. Exporters may apply for a post shipment finance merely to reverse their pre-shipment finance obligation.

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