The world's total exports amounted to nearly $19.2 trillion, while its total imports stood at $17.2 trillion, reflecting the remarkable growth of import and export.
To keep pace with this high demand, businesses must secure adequate funding to fulfill their commercial obligations.
One effective short-term solution is to seek pre-shipment finance.
What is Pre-Shipment Finance?
This refers to funding provided to businesses to cover the costs incurred during the production and preparation of goods before they are shipped to buyers.
This type of financing is usually short-term.
Repayment is expected once the buyer pays for the exported goods.
Pre-shipment finance is also highly beneficial for businesses involved in international trade as it eases the hassle of purchasing raw materials and paying for labor and other expenses incurred.
In addition, by availing services like purchase order financing, businesses can fulfill their short-term capital requirements related to specific customer orders.
Pre-shipment finance also helps enterprises promote their competitiveness in the global marketplace by enabling them to expand their product offerings or enter new markets for profitability.
There are various types of pre-shipment finance available in the US, such as pre-export finance, packing credit, export factoring and more, for exporters to benefit from and improve their products and service offerings.
What is Pre-Shipment Risk?
This refers to the potential risks associated with a transaction or shipment of goods before they are dispatched from the exporter's location.
These risks could be financial, legal or logistical in nature, and could have a significant impact on the exporter's business.
Examples of pre-shipment risks include changes in market conditions, fluctuating exchange rates, non-payment by the buyer, transportation delays and issues related to compliance with local and international regulations.
These risks can cause significant financial losses, damage to the exporter's reputation and delays in the delivery of goods.
What are the Types of Pre-Shipment Finance?
The various types of pre-shipment finance available in the US for exporters include:
1. Packing Credit
This type of pre-shipment finance is used for the purchase of raw materials and processing, packaging of goods prepared for export. It is granted on the basis of a letter of credit.
It eases the exporter’s funding challenges of completing all the necessary tasks before the shipment.
2. Pre-Export Finance
It is used to cover the working capital needs of a business during the pre-shipment phase, including expenses related to product development, marketing and research.
It assists companies in maintaining the quality of their offerings.
3. Export Bills for Collection
This payment method is used in international trade, where the exporter or seller relies on their bank's services to collect payment from the importer or the buyer.
4. Export Credit Insurance
This pre-shipment finance option protects businesses against non-payment by foreign buyers. It is sometimes referred to as trade credit insurance.
Export credit insurance can help businesses reduce their risk exposure and secure more favorable financing terms by safeguarding exporters from payment-related issues.
5. Export Factoring
It provides immediate cash flow by purchasing a business' accounts receivable at a discount.
The factor assumes responsibility for collecting customer payments and pays the business an advance against the outstanding receivables.
What are the Benefits of Pre-Shipment Finance?
The various advantages of using pre-shipment finance are:
1. Reduced Financial Risk
To ensure all the commercial demands of customers are met, exporters must have the funds available to seamlessly cater to their importers’ requests.
Pre-shipment finance can assist businesses with reduced financial risk by offering the required funding to purchase and ship the goods.
2. Improved Cash Flow
Businesses may often require financial assistance to continue their operations without any hassle.
Applying for pre-shipment financing can assist exporters with improved cash flow to ensure they have enough funds to fulfill their orders.
3. Access to Better Financing Terms
With various types of pre-shipment financing available, exporters have the liberty to opt for the one that suits their requirements better.
Pre-shipment financing can assist businesses in gaining better financing terms to offer their products and services smoothly.
How to Obtain Pre-Shipment Finance in the US?
Here are the steps involved in applying for and obtaining pre-shipment finance in the US:
Step 1: Identification
Exporters need to determine the amount of funding they need to finance their production process before their products are shipped.
Step 2: Research
Conduct proper and thorough research on various lenders with expertise in pre-shipment finance and a good reputation for serving their clients well.
Step 3: Preparation
Gathering all the necessary documentation, including financial statements, tax returns, business licenses, and a detailed business plan, can be vital.
Step 4: Submission
Submit the application along with all the required documentation to the chosen lender. Be sure to provide as much detail as possible to increase the chances of approval.
Step 5: Evaluation
The lender will evaluate the exporter’s application and determine their creditworthiness. They will consider factors such as credit score, cash flow, collateral and business plan.
Step 6: Approval
If the application is approved, the lender will provide exporters with a loan agreement outlining the loan terms and conditions, including the interest rate and repayment schedule.
Step 7: Disbursement
Once the exporter has signed the loan agreement, the lender will disburse the funds to the business.
Step 8: Repayment
The exporter will be responsible for repaying the loan according to the terms outlined in the loan agreement. This typically includes making regular payments on a predetermined schedule.
Step 9: Completion
Once the exporter has repaid the loan in full, the loan will be considered complete, and the obligation to the lender will be fulfilled.
What are the Eligibility and Documents Required?
The eligibility requirements and documentation needed for pre-shipment finance in the US may vary depending on the lender and their specific policies.
However, some standard eligibility requirements and documentation generally stand.
Eligibility Requirements: The business must be registered in the US and engaged in international trade. The business must have a good credit history and financial stability.
It must have a proven track record of successful exports or a viable business plan for new exporters.
The shipped goods must be eligible for export and not subject to trade sanctions or embargoes.
Documentation Needed:
Business registration documents (e.g., articles of incorporation, tax ID number, business license)
Financial statements (e.g., balance sheet, income statement, cash flow statement)
Export order or purchase order from the buyer
Bill of lading or other shipping documents
Pro forma invoice detailing the cost of goods and other pre-shipment expenses
Insurance documents for the goods being shipped
Customs and export documentation, if applicable
In addition to the above requirements, lenders may also require additional documentation or information based on their internal policies and risk assessment.
This may include references from suppliers, buyers or other business partners, as well as additional financial statements or credit reports.
Businesses seeking pre-shipment finance in the US should be prepared to provide detailed information about their financial standing and export plans and the necessary documentation to support their application.
By meeting the eligibility requirements and providing the comprehensive documentation, businesses can increase their chances of securing pre-shipment finance and successfully exporting their goods.
How Can Exporters Improve Their Chances of Pre-Shipment Finance Approval?
The following tips may improve the exporter’s chances of getting pre-shipment finance:
1. Choosing the Right Lender
Different lenders have different criteria for approving loans. Researching various lenders to find one that specializes in pre-shipment finance and has experience working with similar businesses is essential.
2. Preparing Proper Documentation
Lenders will require various documents, such as financial statements, tax returns and business licenses, to evaluate the exporter’s loan application.
Ensuring the required documents are ready to submit along with the application can be vital.
3. Having a Sound Business Plan
A well-written and comprehensive business plan shows that the exporters have a clear understanding of their business and its operations.
The plan should include a detailed description of the products, target market, marketing strategy and financial projections.
In conclusion, getting financial assistance from pre-shipment finance can be extremely beneficial and essential for exporters and their businesses.
To prevent compromise on the quality and commitment of the orders, pre-shipment finance can provide the right funding and elevate business operations.