Funder provides an advance to Buyer for prepayment to Seller according to the Sales Contract. The prepayment is provided to the Seller before delivery of goods enables Buyer to secure a favourable long term contract price. It also provides the seller with the necessary working capital to deliver on the contract. After delivery of goods, Buyer in turn sells the goods to End Customer. Repayment is realised from the sale to End Customers. This structure is also known as Indirect Pre-Export Financing.
Prepayment Finance is structured under prepayment arrangement between Funder and Buyer. The loan is often made on a limited recourse basis against the Buyer, meaning the payment risk of the Buyer is passed onto the performance risk of the Seller. To mitigate the performance risk, Funder will often insist on performance guarantees of the Seller or some kind of ECA standby L/C or guarantees. It also includes a limited Security package, but there is control by the Funder over the Sales Contract and Collection Account.