Pre-Shipment Financing

Pre-shipment finance is a type of short-term loan or credit facility provided to exporters in India to finance various activities and expenses related to the production, processing, and packaging of goods meant for export. It is designed to support exporters by ensuring they have the necessary funds to fulfill export orders and prepare goods for shipment to overseas buyers. Pre-shipment finance is a crucial component of trade finance that helps exporters meet their working capital needs during the pre-shipment stage of international trade.


Here are key features and aspects of pre-shipment finance in India:


1. Purpose:


  • Pre-shipment finance is primarily used to cover the working capital requirements associated with the production, procurement, processing, manufacturing, packaging, and transportation of goods that are intended for export.


2. Types of Pre-shipment Finance:


  • Pre-shipment finance can take various forms, including export packing credit, export bills purchased or discounted, and advances against export incentives or subsidies. Export packing credit is one of the most common forms and is specifically tailored to financing pre-shipment activities.


3. Export Packing Credit:

  • Export packing credit is a short-term credit facility extended by banks and financial institutions to exporters. It provides funding for the expenses incurred in preparing and packaging goods for export, including raw materials, labor, packaging, transportation, and overhead costs.

4. Tenure:


  • Pre-shipment finance is typically provided for a short duration, usually ranging from a few weeks to a few months, depending on the exporter's requirements and the specific terms offered by the lending institution.


5. Collateral:

  • Banks may require exporters to provide collateral, which can include the export order or the goods themselves, as security for the pre-shipment finance facility.

6. Interest Rates:


  • The interest rates on pre-shipment finance can vary based on market conditions, the exporter's creditworthiness, and the terms offered by the lending institution. These rates are usually competitive.


7. Documents Required:


  • To avail pre-shipment finance, exporters need to provide relevant documents, including the export order or contract, the pro forma invoice, purchase order, and other documents related to the export transaction. These documents help assess the creditworthiness of the exporter and the viability of the export.


8. Repayment:

  • The exporter typically repays the pre-shipment finance facility once the export proceeds are received from the overseas buyer. This may involve the exporter using the proceeds from the export sale to settle the pre-shipment credit, including any interest charges.


9. Regulatory Framework:


  • The Reserve Bank of India (RBI) regulates and oversees pre-shipment finance and export credit in India, setting guidelines and regulations to ensure smooth trade finance operations.


10. Export Incentives and Subsidies: - Exporters may also receive export incentives and subsidies from the Indian government, which can be used to offset the cost of pre-shipment finance and enhance the competitiveness of Indian exports in international markets.


Pre-shipment finance plays a crucial role in facilitating international trade by providing exporters with the necessary financial resources to fulfill export orders and meet the quality and packaging requirements of overseas buyers. It contributes to the growth of India's export sector by ensuring that exporters can operate efficiently and competitively in the global market.