Meaning
Specialized form of working capital loan provided to a producer to cover the costs of manufacturing goods for which an export order already exists. Pre-export finance is secured by the assignment of the proceeds from the eventual sale of the goods to the international buyer. This allows the producer to buy raw materials and pay for labor and energy before they receive payment from the customer.
It is a common tool in the commodities and heavy manufacturing sectors.
Funding Cycle
Loan is drawn down to start the production process and is repaid directly from the buyer’s payment at the end of the chain. This structure ensures that the money is used specifically for the production of the contracted goods.
Security Assignment
Lenders take a charge over the export contract and the shipping documents to protect their position. They may also require the buyer to pay the funds into a specific account they control.
Production Risk
Success of the arrangement depends on the ability of the manufacturer to deliver the goods on time and to the required quality. If the producer fails to ship the products, the source of repayment for the loan disappears. This financing reduces the gap between the demonstration of capability and the final production yield.
Lenders audit the production schedule to ensure the timeline remains viable.
