Exporters Must Know About Post-Shipment Finance

For an exporter, shipping goods or providing services to an overseas buyer and then receiving payment for it is separated by a significant period of waiting. During this period, what does the exporter do about his working capital needs? He doesn’t wait out the credit period, that’s for sure. Instead, he might opt for trade finance.

Trade finance is a collective term for a wide range of financial tools – cash, credit, investments, etc – available to exporters and importers to facilitate trade. Among the various trade finance tools available, post-shipment credit is popular among exporters. In this piece, we will discuss the various types of post-shipment credit available, where you can avail of them, and how they will help you.

What is Post-shipment Credit?

The Reserve Bank of India (RBI) defines post-shipment credit as:

“Any loan or advance granted or any other credit provided by a bank to an exporter of goods/services from India from the date of extending credit after shipment of goods/rendering of services to the date of realisation of export proceeds and includes any loan or advance granted to an exporter, in consideration of, or on the security of any duty drawback allowed by the government from time to time.”

In simpler terms, this is how post-shipment credit works:

• At the exporter’s request, a bank extends a loan at a concessional rate of interest against evidence of goods shipped or services rendered
• The loan amount can be up to 100% of the invoice value of the goods or services 
• The loan is sanctioned from the date of extending credit after the shipment of goods/rendering of services till the date the importer makes his payment
• It should normally be liquidated or paid back by the proceeds of export bills received from the importer
• The period of realisation of export proceeds is 15 months from the date of export – extended by the RBI in May 2020 from the previous nine-month period on account of difficulties faced by exporters due to Covid-19
• If the amount is not received from the importer within this period, the bank can levy a commercial rate of interest on the loan   
• The exporter can receive post-shipment credit in rupee or in foreign currency. If he has also availed of pre-shipment credit and requested it in foreign currency, then the post-shipment credit will be provided in the same. A pre-shipment credit is a loan or advance provided before shipment to meet production and packing expenses

Why Do You Need Post-shipment Credit?

• It provides working capital for the gap between when your goods are shipped and when you receive payment for them    
• Allows flexibility in extending credit period to your overseas buyer
• No need for collateral to acquire funds
• Helps you focus your energy on growing your business

Types of Post-shipment Credit

1. Export bills purchased/discounted/negotiated

In the first two instances, the exporter submits the bill of lading or airway bill, commercial invoice, packing list, certificate of origin, purchase order and other necessary export documents with the bank. The bank extends post-shipment credit at a concessional interest rate by purchasing or discounting these bills. In the third option (export bills negotiated), finance is provided under a letter of credit – a document issued by the importer’s bank (called an issuing bank) as a promise to pay the exporter an agreed upon sum of money. Post-shipment credit under a letter of credit is considered more secure as the issuing bank guarantees payment to the lending bank.    

2. Advances against bills for collection

Instead of submitting export bills for discount or purchase, the exporter may arrange for them to be sent to the overseas buyer for collection of payment. In such a scenario, the bank grants the exporter an advance against a portion of the collection bills. When payment is received from the importer, it is credited as post-shipment credit. Exporters use this option when there are discrepancies in bills drawn under the letter of credit.        

3. Advances against duty drawback receivable from government

In India, duty drawback is a government scheme that supports exports by offering exporters a rebate on customs and excise duties charged on imported or excisable material used in the production of goods meant for export. It is disbursed by the customs department on submission of export documents. Banks offer credit against such duty drawback receivable from the government after confirming the exporter’s eligibility. The lending bank must also be authorised to receive the claim amount from the concerned government authority.

4. Advance against export on consignment basis

Banks also extend post-shipment credit against exports made on consignment basis – which means the exporter ships the goods to an agent, who sells the goods and makes remittances to the exporter as and when the goods are sold. The exporter receives payment only for the quantity that gets sold. Precious and semi-precious stones, tea, coffee, and wool are examples of goods exported on consignment basis. To avail of post-shipment credit against such exports, the exporter must provide an undertaking that the sales proceeds will be delivered by a specified date. The advance is adjusted against the proceeds realised later.

5. Advance against undrawn balance

In some cases, exporters leave a small portion of the invoice value undrawn for final adjustments towards differences in exchange rates, consignment weight, quality factors, and so on. This undrawn balance is usually 10 percent of the total invoice value. Banks offer advances against undrawn balances provided the exporter gives an undertaking that they will make good on the balance amount within six months of the payment due date or date of shipment, whichever is earlier. The lender also takes into account the importer’s track record before making such an advance. 

Who Can Get Post-shipment Credit?

• All kinds of exporters, including merchant exporters, manufacturer exporters, export houses, trading houses, and manufacturers who supply to merchant exporters, export houses and trading houses  
• Both individuals as well as companies involved in export
• Any other legal entity engaged in the export of goods

Where Can You Get it From?

It isn’t just banks that offer post-shipment credit, or any other kind of trade finance. You can also approach a non-banking financial corporation (NBFC) or foreign trade lender for it:

• Banks: Many banks – nationalised, private, foreign, regional rural,  cooperative – extend post-shipment credit. They offer other forms of trade finance as well, such as foreign currency loans, lines of credit (a revolving credit limit you can borrow, repay and redraw from as you wish), advances against deemed exports and undrawn balance. Most commercial banks advance post-shipment credit up to Rs 10 crore.  
• Export-Import (Exim) Bank of India: A government-owned specialised financial institution, the Exim Bank offers trade finance such as lines of credit, buyer’s credit, corporate banking products and project-based finance. It sanctions loans between Rs 10 crore and Rs 50 crore. Loans above Rs 50 crore require clearance from the working group on export finance, which comprises representatives from the RBI, Exim Bank, Export Credit Guarantee Corporation of India and the exporter’s bank, and sometimes from the commerce and finance ministries.      
• Non-banking financial corporations (NBFC): These offer export-specific financial services such as bill discounting, lines of credit, factoring (selling unpaid invoices to a factoring company at a discount) and working capital loans (a loan to finance everyday operations).

What Documents Are Required for Post-shipment Credit?

You will be expected to submit shipping documents that serve as evidence that the goods have been shipped for export. These include:

• Bill of lading/airway bill
• Commercial invoice
• Packing list
• Certificate of origin
• Inspection certificate
• Insurance certificate
• Import Export Code (IEC) certificate
• Additionally, an original copy of the letter of credit is mandatory if credit has been availed under the letter of credit

Apart from these documents, the lender might demand additional documents depending on the type of post-shipment credit availed.  

Important Tips 

A few things to watch out for when availing of post-shipment credit: 

• Borrow only what you can repay. Defaulting on payments will hurt your credibility for future financing 
• Thoroughly check the terms and conditions of any government benefit you wish to avail of
• Financing comes at a cost. Know of its impact on your bottom line before applying for it

That said, post-shipment credit is an effective, collateral-free way for exporters to manage their working capital and grow their business. It is a key support system that helps India’s exporters play in the global market.