Pre-export finance
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A finance provider pays the exporter before shipment, and the buyer's payment for the goods usually pays the money back.
Terms like this have a quick explainer. Tap or hover on them.
01 · In plain words
A lender pays you before you ship, and your buyer's payment settles the loan
gives an exporter money before the goods ship. In the words of UNCTAD, "exporters are pre-paid for the products they are going to export" (UNCTAD, 1996).
The money is a loan. In a related UNCTAD structure, the loan is made "on the back of assigned export contracts" (UNCTAD, 2001). Assigned means the exporter hands over its right to be paid under the sales contract. The buyer then pays the lender directly (UNCTAD, 2001).
The exporter uses the cash to make or buy the goods. Common uses are materials, labor and stock (US International Trade Administration). Standard market definitions call the same need . Other names for it are purchase order finance, and contract monetization financing (Global Supply Chain Finance Forum).
Who is involved
- The exporter, the seller or producer, receives the money and delivers the goods.
- The finance provider, a bank, a group of banks or another lender, advances the money against the export order.
- The importer, the buyer, stays outside the loan. Its payment for the goods is the usual source of repayment (GSCFF).
- For US exporters only, a US government body can back the loan. and the SBA each offer lenders up to a 90 percent guarantee on US export loans (US ITA).
02 · How it works
Ten steps take the deal from a signed export contract to the exporter's surplus
Figure 1 · Interactive
Pre-export finance, step by step
Read down the steps. Repayment usually comes from the buyer's payment for the goods.
Sources: UNCTAD, 2001 on assignment and buyer acknowledgment; GSCFF, Pre-shipment Finance on security and staged advances; US ITA, Trade Finance Guide, July 2022 on use of funds and guarantees. Step 10 is shown in our worked example.
03 · What it means for you
The exporter gets cash to make the goods, and the importer pays the lender instead of the exporter
Figure 2 · Interactive
What pre-export finance means for each side
Choose your side of the trade.
04 · Worked example
On a $1 million draw for 120 days, interest is $23,333.33 and $56,666.67 is left over for the exporter
This example uses round, made-up numbers. The exporter draws $1,000,000 for 120 days at 7.00% a year. Interest is worked out on a 360-day year, the basis used in US money markets. The buyer then pays the lender $1,080,000 for the goods. Real rates and terms vary by lender, country and deal.
Figure 3 · Illustrative
Repaying a $1,000,000 pre-export draw from the buyer's payment
Illustrative inputs. The amount left for the exporter is highlighted.
Made-up inputs, worked out by our checking script (pre-export-interest.py). Your lender's terms will differ by lender, country and deal.
05 · When to use it
Pre-export finance suits an exporter with a firm order from a sound buyer who agrees to pay the lender
Good fit when
- You hold a firm export contract, and a sound buyer will acknowledge the assignment (UNCTAD, 2001).
- You need cash for materials, labor and stock before you can ship (US ITA).
- You are a small US exporter and need more than a lender offers on its own terms. EXIM or SBA guarantees can apply (US ITA).
Another tool may suit better when
- Your buyer is willing to pay part of the price up front. Look at cash in advance or a red clause letter of credit, which lets the seller draw an advance under an LC.
- Your buyer will not acknowledge the assignment or pay the lender directly. Look at purchase order finance, or finance the invoice after shipment with factoring.
- The deal is a large commodity flow with stock, contracts and collection accounts. Look at prepayment finance or structured commodity finance.
06 · Rules and a real case
The loan papers set the rules, and a US program shows how a guarantee works
The finance agreement, the security agreement and the assignment set the rules for pre-export finance. The lender also weighs in the exporter's country, such as whether the export license will stay valid (UNCTAD, 2001). When the advance runs through a or , the ICC rules apply if the LC names them (ICC). The export contract can use to fix delivery and when risk passes to the buyer (ICC).
A real program. The Export-Import Bank of the United States runs the . EXIM "provides a 90% loan-backing guarantee to the lender". The money can pay for "materials, equipment, supplies, labor, and other inputs to fulfill export orders" and can "purchase finished products for export". EXIM can guarantee both revolving and single-deal facilities. The minimum US content is 10% (EXIM program page).
For export working capital loans in the United States, a single-deal loan is generally issued for up to one year, or for a period that matches a specific export project. Revolving lines of credit are the most common form (US ITA).
Summary
Pre-export finance pays the exporter before shipment, and the buyer's payment settles the loan
The exporter gets cash to make the goods. The lender rests on the export contract and the buyer's promise to pay it directly. The buyer stays outside the loan and pays for the goods as agreed. The exporter's job is to deliver on time and to the contract, because its ability to deliver is the lender's main risk.
Related guides: Pre-export finance; Pre-shipment vs post-shipment finance; Working capital and trade finance. Related cards: Prepayment finance; Purchase order finance; Red clause letter of credit. Every term is in the Trade Finance Glossary.
Sources
- UNCTAD secretariat, Collateralized Commodity Financing, with Special Reference to the Use of Warehouse Receipts (UNCTAD/COM/84), July 2, 1996. Supports: definition: exporters pre-paid for goods they are going to export
- UNCTAD secretariat, Potential Applications of Structured Commodity Financing Techniques for Banks in Developing Countries (UNCTAD/ITCD/COM/31), August 29, 2001. Supports: loan against assigned export contracts, buyer acknowledgment and direct payment, performance risk, political risk
- Global Supply Chain Finance Forum, Standard Definitions for Techniques of Supply Chain Finance: Pre-shipment Finance, 2016. Supports: pre-shipment finance, other names, parties, security, staged advances, source of repayment, primary risk
- US International Trade Administration, Trade Finance Guide: A Quick Reference for U.S. Exporters, Chapters 8, 12 and 13, July 2022. Supports: export working capital uses, advance rates for small exporters, EXIM and SBA guarantees, loan terms
- Export-Import Bank of the United States, Working Capital Loan Guarantee, undated. Supports: the real program
- International Chamber of Commerce, UCP 600, Uniform Customs and Practice for Documentary Credits, in force July 1, 2007. Supports: rules for red and green clause letters of credit
- International Chamber of Commerce, Incoterms 2020, in force January 1, 2020. Supports: delivery and risk transfer in the export contract
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