How Does Post Shipment Finance Work In India And Whats Eligibility Criteria
5/23/2023
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Exporters frequently struggle to control their cash flow while waiting for payment for items transported in the world of international trade. Post shipment finance can help them out in this situation. An Indian exporter may use post shipment credit, sometimes referred to as export post shipment credit, as a financial tool to bridge the time between shipping and payment.
Understanding Post Shipment Finance
The financial alternatives provided to exporters following the shipment of their goods are referred to as post-shipment finance. Its main goal is to give exporters working capital assistance so they can satisfy their financial responsibilities while they wait for payment from the importer. This type of financing is essential for maintaining exporters cash flow and enabling their continuous involvement in global trade.
The Purpose of Post Shipment Finance
The goal of post shipment financing is multidimensional and includes the following major goals:
Cash Flow Management
Exporters may effectively manage their cash flow using post-shipment financing. Exporters can bridge the gap between shipment and payment by taking advantage of these financial resources, assuring seamless operations and on-time payment of their financial obligations.
Working Capital Support
Exporters frequently make substantial financial investments in the manufacturing and shipment of their products. The working capital they require to pay for costs like labor, raw materials, packing, and transportation up until the cash is received is provided via post-shipment financing.
Risk Mitigation
Post-shipment financing aids in reducing the risks connected to late or non-payment by the importer. Exporters can reduce the negative effects of payment ambiguity on their business operations by gaining access to these financial resources.
Exploring The Meaning Of Post Shipment Finance
Post-shipment financing includes a range of financial tools and systems intended to specifically address exporters’ needs. These mechanisms can be divided into several kinds, including:
Export Packing Credit
Exporters can use the export packing credit, a short-term credit facility, to cover their pre-shipment costs. It includes expenses for the production, handling, packaging, and delivery of goods.
Negotiation Of Export Bills
Exporters can sell their export invoices at a discount, on the basis of the importers creditworthiness, to banks and other financial organizations to raise working capital right away.
Export Factoring
The process of export factoring entails the reduced selling of export receivables to a factor (financial institution). The factor assumes control of the payment collection from the importer, giving the exporter access to working capital right away.
Export Credit Insurance
Exporters are shielded from the risk of importer nonpayment by export credit insurance. It offers protection against losses brought on by commercial and political risks, guaranteeing exporters are paid even in the case of an importer default.
Eligibility Criteria For Post Shipment Finance
Exporters must satisfy various eligibility requirements established by banks and financial organizations in order to receive post shipment financing. These standards often consist of:
Exporter’s Qualification
Exporter Codes (IECs) published by the Directorate General of Foreign Trade (DGFT) should be compliant with the IECs. Additionally, they ought to have a successful track record in the export business.
Compliance With Regulatory Requirements
Exporters are required to abide by all laws and rules governing export transactions, including requirements for reporting and documentation.
Track Record And Creditworthiness
Banks and other financial institutions examine the exporter’s creditworthiness and payback capabilities based on their financial statements, credit history, and business reputation.
Interest Rates for Post-shipment Financing
Interest rates for post-shipment financing in India are based on the current market rate, the exporter’s creditworthiness, and the type of financing instrument selected. Processing fees, documentation fees, and administrative fees are possible extra costs. Before making a choice, exporters should carefully research the terms and conditions and compare the rates and fees provided by various banks or financial organizations.
Repayment And Tenure
Depending on the chosen mechanism, different alternatives for post shipment financing repayment exist. It could entail making a lump sum reimbursement after getting the importer’s money or making payments over a set length of time. Post-shipment financing often has a brief duration that corresponds to the exporter’s trade cycle and the terms established with the financial institution.
Role Of Banks And Financial Institutions
Banks and other financial institutions are essential in helping exporters get post-shipment financing. They assess the exporters’ creditworthiness, handle applications, distribute payments, and help with compliance and documentation. These organizations serve as intermediaries, making it possible for exporters to get the funding they need to continue their export-related activities.
Benefits And Risks Of Post Shipment Credit
Some of the benefits and risks of factoring in export finance are listed below-
Benefits Of Post Shipment Finance
Exporters can benefit from post-shipment financing in a variety of ways, such as better cash flow control, working capital support, risk reduction against payment defaults, and the capacity to grab commercial possibilities on global markets.
Risks Involved And Risk Mitigation
Exporters need to be aware of any risks connected to non-payment, delayed payments, or disagreements with the importer. These risks can be reduced by performing enough due diligence, implementing sensible risk mitigation plans, and taking into account export credit insurance.
Government Initiatives And Support
The Indian government has launched a number of programmes and initiatives to encourage and aid exporters that use post-shipment financing. These include the programmes offered by the Export Credit Guarantee Corporation (ECGC), the lending criteria for priority sectors, and the refinancing options offered by organizations like the Export-Import Bank of India (EXIM Bank).
Conclusion
Post-shipment financing is essential for promoting international trade because it gives exporters the resources they need to continue operating. Its goals are to control cash flow, offer working capital, and lessen the risk of late or non-payment. Exporters can use these financial resources to increase their competitiveness in the worldwide market by comprehending the meaning of post shipment finance, investigating its varieties, taking eligibility requirements into account, and assessing the advantages and hazards. Banks, financial institutions, and government programmes all provide assistance to exporters as they strive for expansion and success.
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Saddam Hussain
Saddam Hussain is a digital marketing and supply chain finance expert with over a decade's working experience. He specializes in areas such as invoice discounting, working capital management, cash flow forecasting, and risk mitigation and is passionate about sharing his knowledge and expertise with others. His writing is clear, concise, and accessible to both finance professionals and business owners. He believes supply chain finance is a crucial component of any successful business. His goal is to empower readers with the knowledge and tools they need to achieve these goals. When he's not writing or consulting, he enjoys traveling and trying new foods. You can reach him through LinkedIn or Twitter for a quick chat.