What is pre-export finance?
Pre export finance is a financial instrument where the exporter advances the funds from funder based on their business profile, history of trading with different buyers. The sole purpose of Pre-export finance is to produce and supply goods for the buyer.
Once the history of trading or previous orders is taken as a record for providing funds, it is known as pre-export finance. In this case, the funder provides capital to a borrower, the borrower usually requires finance to produce and supply the product.
In pre-export finance where the buyer or lender would give some finance to production and commencement of trade is required. Some of the amounts should be paid before for the sole purpose of initiating the production process.
This particular type of financing provides the borrower with sufficient cash flow and liquidity to elevate the production of the offered goods and services. This finance is majorly used for large, capital -intensive production operations.
How does pre-export finance works?
The exporter will find the potential buyer for the offered product and services and the buyer will transfer the funds for purchase straight to the lending company. Once the lender sends the funds to the company exporting after deducting the charges related to the interest of prepayment finance of the loan. This particular structure would allow the producer/seller/exporter that they will get paid eventually for the product they are exporting. The finance offers a window to the buyer to enter long-term contracts, which may have been possible without the assistance of the pre-export finance.
Lenders also take care of the terms, under terms related to the trading process such as risk in delivery and prior production. The entire repayment of the loan is entirely based on the cycle of the trade, from production to later sale of the product or services. Many risks are involved, majorly when the seller manages to distribute the goods in time and of the same quality but the buyer fails to make the entire payment.
Pre export finance facility agreements
A typical agreement will include various provisions which mainly focus on the ability of the borrower to produce a product and to generate income by exporting that commodity or product. The key provisions relate to:
- Drawdown and term
- Production
- The offtake contracts
- Regular reporting on the production and sale of the commodity or product
- Insurance
- Debt service cover ratios and top-up clauses, and
- The collection accounts
Pre- export finance can be used for
- Manufacturing
- Processing
- Packing
- Marketing
- Transportation/Shipping
It can be provided in the following forms
- Letter of credit
- Confirmed order as it acts as an evidence for the received order
- Policy issued by the Export Credit Guarantee Corporation
- Personal bond when the party(ies) is already known to the banker
Pre-export finance process:
01
Buyer sends a purchase order( or arranges LC) to the seller02
Client (seller) submits drawdown request for pre-export finance03
Finance provider provides finance and funds account04
Seller uses the finance for various tasks such as procurement of goods, packing, shipment.05
Shipment of goods to the buyer06
On the maturity finance provider debits client account with principal plus interest.
Benefits of pre- export finance
- check_circle_outlineEasy repayment
- check_circle_outlineFlexibility
- check_circle_outlineLow rate of interest
- check_circle_outlineFunds for entire process
Pre-export finance usually cover the following costs:
- Cost of production
- Cost for packing consignments which may include any special packing for export
- Costs of inspection of goods or quality tests if required by the importer
- Transport costs
- Costs involved within port, customs procedure and shipping agents charges
- Freight and insurance cost
- Export duty and other tax if applicable
