What is Post Shipment Finance? Meaning, Types, Eligibility, Documents and How It Works

Post shipment finance plays a pivotal role in sustaining the financial health of businesses involved in exports. It refers to the short-term credit offered to exporters to bridge the gap between the shipment of goods and the receipt of payment. In a global economy, where payment terms often extend over several months, this type of funding is essential for exporters to maintain smooth operations and achieve growth. This article explores the intricacies of post shipment finance, including its purpose, types, working mechanism, eligibility criteria, required documentation, and the amount offered. Indian exporters can leverage this financial tool to ensure consistent working capital, improve cash flow, and strengthen their presence in competitive markets.

What is post shipment finance?

Post shipment finance refers to the credit provided by banks or financial institutions to exporters after the shipment of goods. It bridges the financial gap during the period when the exporter awaits payment from the buyer. This short-term credit can be availed for both domestic and international trade and ensures liquidity to continue daily business operations seamlessly.

The facility is extended against the evidence of goods shipped, such as shipping documents or bills of exchange. It allows exporters to cover essential expenses like transportation costs, production replenishment, and loan repayments without financial strain. Post shipment finance is crucial in helping exporters manage their working capital effectively, ensuring business continuity and profitability.

Purpose of post shipment finance

The primary purpose of post shipment finance is to provide exporters with immediate liquidity after dispatching goods. This ensures that businesses can maintain operations while awaiting payment from buyers.

Key purposes include:

• Cash flow management: It helps exporters meet operational costs without delay, such as wages, raw materials, and overheads. Learn more about efficient cash flow management
• Addressing payment cycles: Export payments are often delayed due to long credit periods or overseas remittance processes. Post shipment finance ensures exporters are not financially strained during this period
• Mitigating risks: Exporters can avoid disruptions in production and supply chain activities caused by payment delays
• Supporting growth: With access to credit, businesses can focus on scaling operations, fulfilling larger orders, and penetrating new markets

By meeting these objectives, post shipment finance empowers exporters to operate efficiently and remain competitive.

Types of post shipment finance

Post shipment finance is offered in various forms, tailored to the specific needs of exporters.

• Export bills purchased or discounted: Banks purchase or discount export bills drawn under confirmed export orders or letters of credit
• Export bills against collection: Financing is extended against shipping documents sent on a collection basis, where payment is realised upon buyer acceptance
• Advance against bills of exchange: Exporters receive credit against bills of exchange awaiting payment. Understand bills of exchange for better clarity
• Advance against duty drawback claims: Credit is provided against claims for refunds on import duties used in export production

These types of finance options enable exporters to customise funding solutions that best suit their trade requirements and cash flow cycles.

How does post shipment finance work?

Post shipment finance follows a structured process designed to ensure seamless funding for exporters:

• Shipment of goods: The exporter ships goods as per the buyer's purchase order or contract
• Submission of documents: Exporters submit essential shipping and financial documents, such as bills of lading and invoices, to the bank
• Assessment by the bank: The bank verifies documents and determines the creditworthiness of the transaction
• Disbursement of funds: The bank releases funds as a percentage of the invoice or export bill value, enabling the exporter to meet financial needs
• Settlement of loan: Once the buyer pays the invoice, the bank liquidates the loan amount along with applicable interest

This system ensures exporters receive timely funding while safeguarding the interests of financial institutions.

Eligibility for post shipment finance

To qualify for post shipment finance, exporters must meet specific eligibility criteria set by financial institutions.

Key requirements include:

• Registered exporter: The applicant must be registered with appropriate authorities, such as the Directorate General of Foreign Trade (DGFT)
• Valid export contract: The exporter should have a confirmed purchase order, letter of credit, or invoice as proof of the transaction
• Creditworthiness: The exporter’s financial stability and repayment capacity are evaluated
• Adherence to compliance: Businesses must comply with applicable trade regulations and provide necessary certifications

Banks may also consider the type of goods exported, market conditions, and buyer credibility while approving post shipment finance.

Required documents for post shipment credit

Documentation is a critical part of the post shipment finance process, ensuring transparency and adherence to regulations.

Commonly required documents include:

• Shipping documents: Bills of lading, invoices, and packing lists as proof of shipment. Learn more about the importance of the bill of lading
• Export contract or purchase order: To validate the terms of the transaction
• Letter of credit (if applicable): Provides assurance of buyer payment
• Duty drawback claims (if applicable): For claiming refunds on import duties
• Bank documents: Includes loan applications and KYC documents

By ensuring the availability and accuracy of these documents, exporters can facilitate faster processing of their post shipment finance applications.

Amount of post shipment finance

The amount of post shipment finance extended to exporters depends on multiple factors, including the value of the goods shipped, payment terms, and the exporter’s credit profile.

Key considerations:

• Percentage of invoice value: Typically, banks offer up to 80-90% of the export bill or invoice value as finance
• Currency type: For international trade, finance may be disbursed in foreign currencies to mitigate exchange rate risks
• Interest rates: Rates are determined based on the exporter’s creditworthiness and prevailing market conditions

This flexibility ensures that exporters have adequate funds to maintain operations and capitalise on growth opportunities.

Conclusion

Post shipment finance is an essential financial tool for exporters, providing immediate liquidity and ensuring stability during extended payment cycles. It allows businesses to manage cash flows effectively, sustain operations, and focus on growth without financial strain. Exporters can also explore business loans for more extensive funding needs or expansion plans. By understanding and utilising post shipment finance, Indian exporters can overcome payment delays, maintain seamless operations, and strengthen their presence in global markets. This tool not only ensures financial stability but also empowers exporters to meet growing demands and achieve long-term success in the competitive trade landscape.