Pre shipment vs post shipment finance

Pre Shipment vs Post Shipment Finance distinguishes funding used while an exporter is producing or preparing an order from funding used after shipment, delivery or performance creates a payment claim. The timing changes the immediate borrower, repayment source and principal risk under review.

Pre-shipment finance commonly supports the exporter before the buyer's payment obligation has become payable. Post-shipment finance supports an exporter-held receivable, or a loan owed by the buyer, after the agreed delivery or performance event. One export transaction can contain both stages, with later payment refinancing or repaying earlier working capital.

Pre Shipment vs Post Shipment Finance timing

The boundary is set by the contract and facility documents. Before shipment or completion, the exporter may incur material, labour, subcontracting and production costs while holding work in progress or inventory. The buyer may have no due receivable at that point, even though the export contract provides the reason for the expenditure.

After shipment, delivery, taking over or another agreed performance milestone, the exporter may have a receivable due from the buyer. In a buyer credit structure, the milestone can support a loan disbursement to the overseas buyer. The exact event depends on the commercial contract, shipping evidence, acceptance terms and financing conditions.

The labels describe the stage of funding rather than a single legal instrument. A bank working capital line can be pre-shipment finance. A receivables purchase, supplier credit facility or buyer loan can be post-shipment finance. An export credit agency may provide insurance or a guarantee for either type of bank exposure under different product terms.

Working capital before delivery

The Berne Union describes working capital insurance as protection for the financial institution behind a working capital facility used for an export transaction. The cover addresses the institution's risk that the exporter will not pay principal, interest or other amounts due under the facility.

The Berne Union describes working capital insurance as indemnifying the bank after a short waiting period, usually three months, once the exporter defaults on the facility. That waiting period is a feature of the claims process, not the duration of cover, which instead runs for the manufacturing or completion period.

The exporter uses the facility during manufacture or completion. Repayment is expected from the client's payment, refinancing or another agreed source once delivery or performance has taken place. The insured bank exposure is therefore linked to the exporter during a stage when the buyer receivable may not yet have matured.

This structure differs from insurance of the buyer's post-shipment debt. Working capital insurance protects the financing institution against the exporter's failure to repay its facility, subject to the policy. It does not turn the bank's loan into a receivable owed directly by the overseas buyer.

The production period can contain risks that are less prominent after delivery. The exporter may fail to complete, the order may be cancelled, costs may exceed available funds or delivery may be delayed. The facility documents and any cover should identify whether those events affect eligibility, repayment or claims.

Supplier credit after shipment

Supplier credit arises when an exporter supplies goods or services and allows the overseas buyer to pay over an agreed period. The exporter is both seller and creditor. The receivable is created by the export contract and remains with the exporter unless it is assigned, discounted, insured or otherwise financed.

Post-shipment supplier credit centres on buyer payment risk. The buyer may fail to pay because of insolvency, default, a commercial dispute or a political event affecting payment. Applicable insurance or guarantee can cover defined risks, but the underlying payment relationship remains between exporter and buyer.

Pre-shipment working capital can sit ahead of supplier credit. The exporter borrows to complete the order, delivers the goods and expects the buyer receivable to repay or refinance the earlier borrowing. The two facilities have different obligors and payment paths even when they fund one export contract.

The transition must be documented. Delivery may create the receivable, release a draw under a buyer facility or trigger repayment of the working capital line. A delay at the transition can leave the exporter with production debt and an uncertain receivable. A credit review should state which event changes the risk from production to buyer payment.

Buyer credit after performance

Buyer credit places the loan with an overseas buyer or another overseas borrower. The OECD Arrangement describes official support that can include a guarantee or insurance for a financial institution's loan to an overseas buyer. The exporter's payment and the buyer's extended repayment are separated through the financing structure.

UKEF's Buyer Credit Facility provides a published example. UKEF guarantees a bank making a loan to an overseas buyer for eligible capital goods, services or intangibles. The exporter is paid up-front as though under a cash contract, while the buyer receives extended repayment terms. That is a buyer loan, not an exporter working capital facility.

Pre-shipment working capital may still be needed before buyer credit disbursement. The exporter can incur costs during manufacture, and financing may pay the exporter only when relevant export or performance conditions are met. The bank assessing pre-shipment exposure therefore looks at the exporter and completion, while the buyer credit lender assesses the buyer's loan repayment.

An export credit agency can support either exposure through a different product. Official support should be tied to the named borrower, lender, facility and covered risks. A buyer credit guarantee does not automatically cover the exporter's earlier working capital debt.

Pure cover and official financing

The OECD Arrangement separates pure cover from official financing support. Pure cover is insurance or a guarantee without official financing support. Official financing support includes direct credit, refinancing or interest rate support. This classification describes how official support is delivered, not when export funding occurs.

A bank's pre-shipment working capital line can have pure cover. A buyer credit can also have pure cover attached to a bank loan. Another structure may involve direct official financing or refinancing. Stage, borrower, repayment source and support form are separate fields in a credit description.

Credit analysis across the boundary

The review should identify:

• the funded stage and contractual event that marks the transition
• whether the borrower is the exporter, buyer or another obligor
• whether repayment comes from delivery proceeds, receivable collection or loan instalments
• which insurance, guarantee or other support attaches to the exposure
• what happens if delivery, acceptance, disbursement or buyer payment is delayed

The same goods should not support conflicting advances without a clear conversion or repayment mechanism. A working capital line may be repaid when a buyer facility pays the exporter. An open account sale may instead lead to receivables finance. The legal and operational documents should show the route.

Pre Shipment vs Post Shipment Finance is therefore a timing and risk allocation comparison. Pre-shipment funding supports exporter performance before delivery. Post-shipment funding supports an exporter receivable or buyer loan after the relevant performance event. The supplier credit, buyer credit and export credit agency concepts identify later payment structures and official support, while facility documents determine the boundary.