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You've landed an export order. The buyer is overseas, the margins are excellent, and the Letter of Credit is confirmed. But you need R2 million to manufacture the goods before you can ship them.

This is the export funding gap. You can't get paid until you ship. You can't ship until you manufacture. You can't manufacture without capital.

Pre-shipment finance exists to bridge this gap. It's funding specifically designed for exporters who need capital to fulfil confirmed international orders.

What Is Pre-Shipment Finance?

Pre-shipment finance (also called packing credit or export working capital) is short-term funding provided to exporters to help them manufacture, purchase, or pack goods before shipping to an overseas buyer.

The financing is typically secured against a confirmed export order, usually backed by a Letter of Credit (LC) or a confirmed purchase order from a creditworthy international buyer.

Once you ship the goods and present the required documents, the financing is repaid from the export proceeds.

How Does It Work? Step-by-Step

The Pre-Shipment Finance Process

Step 1: Receive Confirmed Export Order

Your overseas buyer issues a Letter of Credit through their bank, or you receive a confirmed purchase order from a creditworthy international company.

Step 2: Apply for Pre-Shipment Finance

You submit the LC or export order to a bank or trade finance provider. They assess the buyer, the issuing bank, and the transaction structure.

Step 3: Receive Funding

Once approved, you receive funds (typically 70-90% of the order value) to purchase raw materials, pay for manufacturing, and prepare goods for export.

Step 4: Manufacture and Ship

You produce the goods, complete quality control, and ship according to the LC terms. You obtain the required shipping documents (bill of lading, commercial invoice, packing list, etc.).

Step 5: Present Documents

You present the shipping documents to your bank. They forward them to the buyer's bank for payment.

Step 6: Receive Payment and Settle

When the buyer's bank pays under the LC, your bank deducts the pre-shipment finance plus interest, and credits the balance to your account.

A Real Example (In Rands)

Let's say you manufacture agricultural equipment and receive an export order from a buyer in Kenya, backed by a confirmed LC for USD 150,000 (approximately R2.7 million at R18/USD).

LC Value:R2,700,000
Your Production Cost:R1,800,000
Pre-Shipment Finance (80%):R2,160,000
Interest (90 days at 12% p.a.):R64,800
Your Profit After Finance:R835,200

Without pre-shipment finance, you couldn't have fulfilled this R2.7 million export order. With it, you made over R800,000 in profit.

Types of Pre-Shipment Finance

Packing Credit

A loan provided against a confirmed export order or LC to finance the purchase of raw materials and manufacturing costs. The most common form of pre-shipment finance.

Advance Against LC

Your bank provides an advance against an irrevocable LC before shipment. The LC serves as primary security for the advance.

Green Clause LC

A special type of LC that authorises the advising bank to make advances to the exporter before goods are shipped. The advance is built into the LC terms.

Red Clause LC

Similar to green clause, but allows advances without requiring warehouse receipts. Less common due to higher risk for the issuing bank.

What Do Financiers Look At?

LC Quality: Is the LC irrevocable? Is it confirmed by a reputable bank? What are the payment terms?
Issuing Bank:The creditworthiness of the buyer's bank matters. A major international bank provides more security than an unknown regional bank.
Your Export Track Record: Have you successfully completed export orders before? Experience matters.
Production Capability:Can you actually manufacture and ship the goods on time? They'll want to see your capacity.
Country Risk: Some destination countries carry higher political or currency risk. This affects terms and pricing.

Pre-Shipment vs. Post-Shipment Finance

Aspect	Pre-Shipment	Post-Shipment
Timing	Before goods are shipped	After goods are shipped
Purpose	Fund production/procurement	Bridge until payment received
Security	LC or confirmed order	Shipping documents
Risk Level	Higher (goods not yet shipped)	Lower (goods already in transit)
Typical Rate	Higher	Lower

Frequently Asked Questions

Do I need a Letter of Credit for pre-shipment finance?

An LC is preferred because it provides strong security. However, some financiers will consider confirmed purchase orders from creditworthy international buyers, especially if you have a track record.

What percentage of the order value can I get?

Typically 70-90% of the order value, depending on the LC terms, your track record, and the financier's assessment of the transaction.

How long does approval take?

If you have an existing facility, funding can be released within 24-48 hours of presenting the LC. Setting up a new facility can take 2-4 weeks.

What happens if my buyer doesn't pay?

If you have a confirmed irrevocable LC, the confirming bank is obligated to pay regardless of the buyer's situation. This is why LC quality matters so much.

Can I use pre-shipment finance for domestic orders?

Pre-shipment finance is specifically for export transactions. For domestic orders, you would look at purchase order financing or invoice discounting.

The Bottom Line

Pre-shipment finance unlocks export opportunities that would otherwise be impossible. If you have a confirmed international order but lack the capital to produce and ship, this is the solution.

The key is having strong export documentation: a quality LC from a reputable bank, clear production capability, and ideally some export track record.

Have an Export Order You Need to Fund?

Send us your LC or export order details. We'll assess the transaction and connect you with the right trade finance partner within 24-48 hours.

WhatsApp Us Now Email: lizo@demng.co.za

How Pre-Shipment Finance Works (Complete Guide for SMEs)