Post-Shipment Finance: a Worked Example

Before shipment a lender to an exporter is relying on a factory. After shipment it is relying on a payer. The exporter now holds a transport document, an invoice and, depending on the payment terms, a draft or a credit. Those documents are what post-shipment finance lends against, and they give the bank something pre-shipment lending lacks: a debt that exists, with a due date and a named debtor.

The finance runs from shipment until the buyer, or its bank, pays. Under a sight credit that may be days; under a usance credit, a bill at 120 days or an open-account invoice, it can be months. The bank sizes and prices it on two things: the strength of whoever must pay, and how reliably the money will travel back through the bank.

Under a usance letter of credit, once the issuing or confirming bank has accepted the draft or incurred its deferred payment undertaking, the exporter holds a bank's promise to pay on a fixed date. Where a nominated bank, such as the confirming bank, has itself accepted the draft or incurred the undertaking, UCP 600 authorises it to prepay or purchase its own acceptance or undertaking, and the issuing bank still reimburses it at maturity. That is why such discounting can be offered without recourse to the exporter, most clearly where the discounting bank has itself confirmed the credit.

On a collection the banks handle the documents but none has promised to pay. An advance against documents on D/P terms relies on the buyer taking them up; against an accepted bill on D/A terms, on an acceptance worth what the buyer is worth. Open account goes further: the goods and the documents have already gone to the buyer, and the receivable is its promise on an invoice. Advances on collections and open account are usually made with recourse to the exporter, unless trade credit insurance or a purchase without recourse takes the buyer's risk.

A seafood processor, constructed for this page like every figure in it, ships three consignments, each invoiced at US$600,000 and payable 120 days after shipment, to three buyers on three terms. Its bank's offer on each shows what the promise behind it is worth. Each is financed for the full 120 days, to keep the comparison simple. The advance rates and prices are the example's, not a market norm.

Line A is cheap and final because a bank has undertaken to pay on a fixed date and another has confirmed it; barring fraud, the exporter is out of the transaction once the documents comply. In B, if the buyer does not pay at maturity, the bank recovers its US$480,000 from the exporter, and the exporter's own working capital has to find it. In C, an insured US$540,000 more than covers the US$480,000 advanced, if the claim is paid. A claim can fail on the policy's conditions, a buyer limit the insurer has cut, or a dispute about the goods, and then the bank is back to the exporter for all of it.

That is the question at the centre of Issue 13, where an exporter's largest customer asks to move from letters of credit to open account. The invoice is the same. The debtor is not.

Pre-shipment finance lends against an order and the exporter's ability to fill it; post-shipment finance lends against a receivable that exists. The two are often one facility, the first repaid by the second on the day the documents are presented.

At the far end sits forfaiting, a form of post-shipment finance taken to its limit: the outright purchase, without recourse, of longer-dated paper backed by a bank, such as avalised notes or deferred payments under a credit. Ordinary post-shipment lending is shorter and more often with recourse. Forfaiting is how an exporter sells years of instalments and steps away.

DEFINED IN ONE PARAGRAPH → · PRODUCT FILE: LC DISCOUNTING → · PRODUCT FILE: INVOICE FINANCE →

The facility letter follows the table. A line for discounting accepted usance credits without recourse consumes the bank's limits on the issuing and confirming banks and their countries, more than its limit on the exporter. An advance line on collections and open account is a limit on the exporter, often with sub-limits by buyer and a borrowing base that counts only eligible receivables: within terms, not disputed, not owed by a related company, and insured where the bank requires it.

The documents are where it goes wrong. A discrepant presentation turns a bank's promise back into something close to a collection: the issuing bank may refuse, or ask the buyer whether it will waive the discrepancy, and a bank that advanced against a discrepant set is lending on the buyer's goodwill. A file that moves from credits to open account keeps the same exporter, the same goods and the same invoice, but now carries a different debtor, and the limit, the price and the insurance have to move with it.

ISSUE 13 · THE TRADE TERMS → · HOW BANKS READ EXPORTERS → · CONFIRMED LETTER OF CREDIT →