Pre-shipment finance is credit provided to an exporter before the goods are shipped, to pay for raw materials, labour, processing, packing and transport to the port. It bridges the gap between receiving a firm export order and having shipping documents that can be presented for payment. The loan is normally repaid from the export proceeds, or replaced by post-shipment finance once the goods have left.
Pre-shipment finance is a broad category rather than one product. It includes packing credit, the classic South Asian form, as well as purchase order financing, advances under a red clause letter of credit, inventory loans and the pre-export finance used in commodity trading. Its main risk for the lender is performance risk: the chance that the exporter never ships at all.
Pre-shipment finance in plain terms
A baker who wins an order for 500 wedding cakes needs flour, sugar and extra staff weeks before the customer pays. Pre-shipment finance is a loan to buy those ingredients and wages, given because a real order exists and will be paid once the cakes are delivered.
The lender is betting on the baker's ability to finish and deliver, not only on the customer's ability to pay. So it will want to see the order, check that the baker has done similar jobs before, and make sure the money is spent on ingredients rather than on something else. When the cakes are delivered and the invoice is paid, the loan is repaid from that payment.
Forms of pre-shipment finance
- Packing credit. A short-term loan against a confirmed order or letter of credit, widely used in India, Pakistan, Bangladesh and Sri Lanka, often at concessional rates.
- Advance against a letter of credit. A loan by the exporter's bank secured on an incoming letter of credit; under a red clause credit, the advance is authorised by the credit itself and the importer's bank ultimately carries the risk.
- Purchase order finance. A funder pays the exporter's own suppliers against a creditworthy buyer's order, common for traders without much collateral.
- Inventory and warehouse finance. Loans against stock, either through general inventory financing or against goods held in an independent warehouse through warehouse receipt financing.
- Pre-export finance. Larger loans to commodity producers, repaid from assigned future export contracts with offtakers.
- Government-guaranteed working capital. Bank loans partly guaranteed by an export credit agency, such as the working capital programmes run by the Export-Import Bank of the United States and UK Export Finance.
How lenders control the risk
Because the goods do not yet exist, lenders rely on structure more than on security. They typically sanction the loan only against a firm order or credit, lend a percentage of the order value and require the exporter to fund the rest (the margin), and release money in stages tied to production. They monitor end use by paying suppliers directly where possible, and they insist that the export documents are routed through them so that proceeds are used to repay the advance. Where the order is under a letter of credit, the lender also checks that the credit's documentary terms are realistic and that the latest shipment date leaves enough time to produce.
Lenders also look at the exporter's track record, the buyer's credit quality, and the risk that the buyer cancels the order or rejects the goods. Some take collateral over raw materials and work in progress, or ask for export credit insurance that includes pre-shipment cover against contract frustration.
Pre-shipment and post-shipment finance compared
| Feature | Pre-shipment finance | Post-shipment finance |
|---|---|---|
| Timing | From order to shipment | From shipment to receipt of payment |
| Main risk | Exporter fails to perform | Buyer or its bank fails to pay |
| What backs it | An order or credit, and the exporter's capacity | Shipping documents, bills or insured receivables |
| Typical repayment | From export proceeds or conversion to post-shipment credit | From the buyer's payment |
In practice the two are linked: once shipment takes place, a bank often repays the pre-shipment loan by discounting or negotiating the export bill, so that the exporter moves from one facility to the other without receiving cash in between.
Policy and compliance considerations
Many governments subsidise pre-shipment credit to support exports, particularly for micro, small and medium enterprises. India's interest equalisation scheme, which ran from 1 April 2015 to 31 December 2024, reduced interest on rupee pre- and post-shipment export credit for eligible exporters, and the State Bank of Pakistan has run its Export Finance Scheme since 1973. Such schemes must also stay within the export-subsidy rules of the World Trade Organization (WTO).
Concessional finance creates temptations. Banks watch for fictitious orders, round-tripping of goods, over-invoicing and diversion of cheap export credit into other uses, patterns associated with trade-based money laundering. They also check that proceeds are received in time under export proceeds repatriation rules and that parties pass sanctions screening. Pre-shipment lending is part of a company's wider working capital funding and is usually sized against the length of its production cycle.