Post-Shipment Finance

Post-shipment finance is credit provided to an exporter after the goods have been shipped, secured on the shipping documents, the export bill or the receivable from the foreign buyer. It covers the period between shipment and the date the buyer actually pays, which can be days under a sight credit or many months under deferred terms. The finance is repaid from the buyer's payment when it arrives.

Post-shipment finance follows pre-shipment finance in the export cycle, and often repays it. Its main forms are negotiation of documents under a letter of credit, discounting or purchase of export bills, advances against bills sent on documentary collection, export factoring and forfaiting. The lender's main risk shifts from whether the exporter can deliver to whether the buyer, or the buyer's bank, will pay.

A freelance designer finishes a job and sends the invoice, but the client pays only in 60 days. Rent is due now. If a lender advances most of the invoice today and collects the full amount from the client later, the designer is using the equivalent of post-shipment finance.

For exporters, the "invoice" is a set of shipping documents or a bill of exchange, and the "client" is a buyer abroad. Because the work is already done and the goods are on their way, the lender is no longer worried about whether the exporter can deliver. Its concern is whether the money will arrive from the other country, and on time.

• Negotiation under a letter of credit. The exporter's bank, acting as nominated bank, pays against complying documents before it is reimbursed by the issuing bank.
• Discounting of usance bills. The bank pays the present value of an accepted time draft, through export bill discounting; banks often book these as bills purchased and discounted.
• Advance against collection bills. A loan for part of the value of bills sent under documents against payment or documents against acceptance (D/A) terms, usually with recourse.
• Export factoring. A factor buys open-account invoices, with or without recourse; see factoring without recourse.
• Forfaiting. Without-recourse purchase of bank-guaranteed medium-term instruments, typically from supplier credit deals.
• Insured receivables finance. Lending against receivables covered by export credit insurance assigned to the bank.

The choice among these depends mainly on the payment term agreed with the buyer. Letter of credit business lends itself to negotiation or discounting, collections to advances against bills, open-account sales to factoring or insured finance, and multi-year deferred payment to forfaiting. Exporters with many buyers often use more than one form at the same time, under a single trade facility with their bank.

For a usance bill discounted on a simple-interest basis, the amount the exporter receives is:

• $F$ is the face value of the bill.
• $r$ is the annual discount rate, written as a decimal.
• $d$ is the number of days from the discount date to maturity, plus any transit days the bank adds.

Suppose an exporter holds a bill for $250,000 payable in 90 days and its bank discounts it at 8% a year. The discount is $250,000 × 0.08 × 90/360 = $5,000, so the exporter receives $245,000 today, before any handling fees. Some markets use a 365-day year instead of 360, which slightly changes the result, and the bank adds charges for document handling and courier costs.

Whether post-shipment finance is with or without recourse decides who bears the loss if the buyer does not pay. Negotiation and discounting by the exporter's own bank are usually with recourse: if payment fails, the bank debits the exporter. Confirmed letters of credit, forfaiting and non-recourse factoring move the risk to the financier, at a higher price. Lenders assess the buyer, the issuing or accepting bank, the country's transfer risk and capital controls, and the quality of the documents, because a discrepancy can delay or defeat payment. Long-unpaid export bills become overdue advances on the bank's books and, in time, can turn into a non-performing loan.

In India, banks provide post-shipment credit in rupees or in foreign currency, and the government's interest equalisation scheme, which ran from 1 April 2015 to 31 December 2024, reduced the cost of rupee post-shipment credit for eligible exporters. In Pakistan, the State Bank of Pakistan's Export Finance Scheme covers both pre- and post-shipment stages. In most countries, the finance must be settled from export proceeds received within the period allowed under export proceeds repatriation rules. Post-shipment finance is a key lever for reducing days sales outstanding (DSO) in exporting companies and for funding working capital through the trade cycle.

• International Chamber of Commerce
• Reserve Bank of India