As an exporter, one of the biggest challenges in the export business is the waiting period between shipping goods (or providing services) to an overseas client and the time in which you get paid for the goods and services that you have provided. The larger the shipment, the larger the risk, and the more potential issues that could be involved. There may be many costs that you will have to cover yourself while you wait for that final payment, and in many cases, the cash flow may just not be possible. This is where trade finance comes in.
Trade finance is a collective term used for a wide range of financing, credit and investment options that are available to importers and exporters to assist with making international trade more feasible.
In this article, we’ll take a look at a very specific form of trade finance, known as post-shipment finance, why it is used, when it used, and how it could help your exporting business!
What is post-shipment finance?
Post-shipment finance is a very popular type of trade finance that allows exporters to have working capital while they wait for payment on their exported products or services by international clients. This special loan is usually given to exporters by UK banks, and the loans are generally sanctioned from the day that the goods are shipped through to when the exporter receives payment from the client. However, time frames can vary from lender to lender.
What is the process for post-shipment finance?
While post-shipment finance will differ slightly depending on the amount, the type, and the lender, the general process is as follows:
- The exporter requests a loan from the bank once they have all the necessary documentation in place.
- The bank offers a loan at concessional rate based on the evidence of the goods or services sold to an international client.
- The loan may be as much as the total value of the goods being exported. The larger the loan, the higher the interest rate. There should be various options available to you.
- The time frame of the loan usually runs until the international client makes payment to the exporter but can run longer.
- The loan is paid back once the exporter receives payment from their client.
- In some cases, the loan can be paid back a few months after payment from a client was received.
- The process is repeated for the next export if there is one.
Keep in mind that the process will differ slightly depending on the lender. Be sure that you understand the process entirely and what is expected of you before signing any documentation. There can be a lot of admin involved, but it is worth having those funds available to keep your business running.
The different types of post-shipment finance
There are three main types of post-shipment finance that exporters can make use of, including:
In the case of a physical export loan, the loan is made out to the exporter who is in the trade documents.
In the case of deemed export, finance is offered to the exporter for various agencies.
Capital goods and project export
In this type of finance, finance is in the name of the international buyer, but it is given to the local exporter.
There are a few other types of post-shipment finance, but the above are the most common and the most popular.
How post-shipment finance can help your export business
In most cases, international clients only pay for their goods or services once they have been received, so this leaves a gap in which you may struggle with cash flow and working capital. Making use of post-shipment finance takes away the stress and anxiety of waiting for your client to pay and gives your client some sort of flexibility when it comes to payment.
Post-shipment finance gives you peace of mind and allows you to focus on growing your business, as there is no need for collateral to acquire funds.
Most importantly, you’ll have the necessary funds to keep your business running and will be able to pay staff, work on other deals etc.
Who can use post-shipment finance?
Post-shipment finance is available to a wide variety of exporters, both small and large. These include manufacturing exporters, export houses, export agencies, and individual exporters, among others, so long as the necessary documentation is provided.
What documentation is needed to access a post-shipment loan?
While each bank or lender will have slightly different requirements when it comes to the documentation that you need, you should keep in mind that most lenders will require you to have the following in order before offering you any type of finance:
- Inspection certificate
- Insurance certificate/ proof of insurance
- Airway bill
- Packing list
- Commercial invoice
- Import-export certificate
- Details of the exporter (company records, accreditations etc.)
Ensure that you have all the necessary certified documents available to you before you start the process.
Tips when it comes to taking out post-shipment finance
While post-shipment finance can offer your business incredible benefits, keep in mind that you should only use it if you need to, and once you have sufficiently researched the options that you have available to you. Any type of trade finance should be taken seriously.
The most important thing you need to keep in mind is that you need to know that you’ll be able to pay the loan back. You also need to calculate the interest on the loan and ensure that it doesn’t infringe too much on your profit margin. You don’t want to end up running at a loss because of post-shipment finance.
If there is anything you don’t understand or need clarity on, you should make use of the services of a professional financial advisor or import/export expert so that you don’t go down a precarious path when it comes to post-shipment finance.