Prepayment finance
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A buyer pays the producer in advance, with money from a bank or its own funds, and the producer pays it back with future deliveries of goods.
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01 · In plain words
A buyer pays the producer in advance, and the producer repays with goods
In , a bank gives money to an international company. That company uses the money to pay a local producer in advance, so the producer can buy and process the goods locally (UNCTAD). The international company is the buyer. People also call it the offtaker. It takes the goods.
The producer pays the advance back with goods instead of cash. In one company filing, money drawn "can be repaid through future oil deliveries" (GeoPark, Form 20-F).
The contract protects the bank. The bank's security "lies in the assignment of the pre-paid export contracts" (UNCTAD). In plain words, the buyer hands its rights under the prepaid contract to the bank.
It is close to pre-export finance. The difference is who the bank funds. In prepayment finance, the bank funds the buyer, and the buyer pays the producer (UNCTAD).
Who is involved
- The producer, the local exporter, receives the advance and delivers the goods.
- The buyer, the , pays the advance and takes the goods.
- The bank funds the buyer. A buyer can also pay the advance from its own money. In the GeoPark filing, no bank is named.
02 · How it works
Eight steps take the deal from the signed contract to the bank being repaid
Figure 1 · Interactive
Prepayment finance, step by step
Read down the steps. Deliveries in step 7 pay back the advance.
Sources: UNCTAD, Potential Applications of Structured Commodity Financing Techniques, August 2001; GeoPark Ltd, Form 20-F 2025, Note 29 on repayment through deliveries.
03 · What it means for you
The producer gets money before it delivers, and the buyer and its bank rely on the producer delivering
Figure 2 · Interactive
What prepayment finance means for each side
Choose your side of the trade.
04 · Worked example
A $1,000,000 advance is paid back with goods in 11 months, with $33,419.94 of interest
This example uses round, made-up numbers. The producer delivers 500 tonnes a month at $400 a tonne, so each delivery is worth $200,000. Half of each delivery's value, $100,000, pays back the advance. That amount covers the month's interest first, at 7.00% a year on a 360-day basis, and the rest reduces the advance. The producer receives the other $100,000 in cash. In month 11, the last $33,419.94 is paid back, and the producer receives $166,580.06.
Figure 3 · Illustrative
A $1,000,000 prepayment repaid through monthly deliveries
Illustrative inputs. The total interest is highlighted.
Made-up inputs, worked out by our checking script (05_worked_examples/cards/prepayment-finance.py). Real rates, prices and delivery terms differ by deal.
05 · When to use it
Prepayment finance suits a producer that needs money to buy and process goods, and a buyer the bank will fund
Good fit when
- A producer needs money to buy and process goods locally, and a buyer wants those goods (UNCTAD).
- Deliveries can be planned and valued, so they can pay back the advance step by step.
- The bank would rather rely on the buyer's credit, with the prepaid contract as security, than lend to the producer directly.
Another tool may suit better when
- No buyer will take on the funding. Look at pre-export finance, where the producer is funded directly.
- The producer's ability to deliver is in doubt. The bank must judge that risk closely (UNCTAD). Look at structured commodity finance.
- The producer needs money against a single firm order. Look at purchase order finance.
06 · Rules and a real case
The contracts set the terms, and a public filing shows a real deal
Prepayment finance runs on the contracts the parties sign: the offtake and prepayment agreement, the bank's facility and the assignment (UNCTAD). When the supply contract names an rule, that rule fixes where each delivery is made and when risk passes to the buyer (ICC). If the rate can change, part of the cost follows a public rate such as . For SOFR business loans, ARRC recommends counting interest on a 360-day year (ARRC).
A real case. GeoPark, an oil producer, reports its prepayment deals in its annual report to the US SEC, filed March 31, 2026. In May 2024, GeoPark signed an offtake and prepayment agreement with the trader Vitol. Money drawn can be paid back through future oil deliveries, over a minimum of 20 months and up to 36 months from July 1, 2024. The interest is based on SOFR plus a margin. GeoPark also signed a deal with BP with a 12-month starting August 1, 2025. Under it, money drawn can be paid back with crude oil deliveries or repaid early at any time (GeoPark Ltd, Form 20-F, Note 29).
Summary
Prepayment finance pays the producer first and is repaid in goods
The buyer pays the producer in advance, with a bank's money or its own, and the producer pays it back with deliveries. The bank relies on the buyer and on the prepaid contract. Everyone depends on the producer delivering as agreed, so the delivery plan and the contract terms are key.
Related guides: Pre-export finance; Structured commodity finance; Financing agricultural commodity trade. Related cards: Pre-export finance; Structured commodity finance; Purchase order finance. Every term is in the Trade Finance Glossary.
Sources
- UNCTAD secretariat, Potential Applications of Structured Commodity Financing Techniques for Banks in Developing Countries (UNCTAD/ITCD/COM/31), August 29, 2001. Supports: definition, the parties, the bank's security, performance and political risk
- UNCTAD secretariat, Collateralized Commodity Financing, with Special Reference to the Use of Warehouse Receipts (UNCTAD/COM/84), July 2, 1996. Supports: pre-export finance, for the comparison
- US SEC EDGAR, GeoPark Ltd, Form 20-F for fiscal year 2025, Note 29 Offtake and prepayment agreements, March 31, 2026. Supports: the real case, repayment through deliveries, terms, SOFR-based cost, early repayment
- International Chamber of Commerce, Incoterms 2020, in force January 1, 2020. Supports: delivery terms
- Alternative Reference Rates Committee, SOFR "In Arrears" Conventions for Syndicated Business Loans, July 22, 2020. Supports: the 360-day basis in the worked example
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