Packing credit is the most commonly used trade finance tool by an exporter. It is also called pre-shipment finance. And it is very important to small and medium enterprises for their financing needs. The international sales cycle is comparatively longer than that of domestic sales. This makes packing credit a very convenient and handy line of credit for exporters.
Definition of Packing Credit
Packing credit is basically a loan provided to exporters or sellers to finance the goods’ procurement before shipment. The bank will make the funds available to a letter of credit issued favoring the seller and a confirmed order for selling the goods or services. The advance is provided to purchase raw materials, process, manufacture, pack, market, and transport the required goods and services.
- Definition of Packing Credit
- Features of Packing Credit
- Process of Packing Credit
At times, it also works to finance the working capital. And also to meet the requirements of wages, travel expenses, utility payments, etc., for companies listed as exporters.
Generally, importers are not ready to advance payments to exporters as it is not secure and full of risk for them. In such scenarios, the facility of export packing credit supports the exporter’s supply chain and provides the funds to bridge the gap until the final payment. The bank issuing the packing credit will usually advance the partial or full proportion of the invoice, depending on the assumed risk. It is especially viable for exporters who export goods overseas as it has a more flexible repayment plan than the usual bank loans. The loan can be in either the exporter’s currency or another easily convertible currency mutually decided by both the exporter and the lending bank.
Banks and other lending institutions follow their internal processes. Such as verification of the buyer, scrutiny of the purchase order, or the letter of credit to authenticate the transaction. However, the documentation and the credit process are not very complex in a packing credit loan. The loan can be in the form of a fund-based or a non-fund-based credit.
Features of Packing Credit
It has the following features:
The Self-liquidating feature is the most significant feature of it. The loan can be liquidated against the final payment of the goods and services or can even be converted to post-shipment finance post the shipment of the goods. This is extremely beneficial to small exporters who may not have the required capital. This also eliminates a lot of risk from the financing as the bank has the assurance of payment before the exporter receives the proceeds.
Temporary in nature
Packing Credit is a short-term financing facility that is meant to cater to the specific needs of the pre-shipment phase. It is generally granted for a period of 90 to 180 days, but it can be extended based on the exporter’s requirements and the approval of the financial institution.
Financial institutions typically require exporters to provide suitable collateral or security to avail of Packing Credit. The collateral can be in the form of export orders, export receivables, hypothecation of goods, or other acceptable forms of security.
Exporters need to provide relevant documents to avail of Packing Credit. These documents may include export orders, export contracts, purchase orders, invoices, insurance policies, shipping documents, and any other documents required by the financial institution.
Credit to Buy Goods
Packing credit is convenient to purchase expensive goods or raw materials even if they exceed the set budget.
Covers Manufacturing Expenses
Packing credit also covers manufacturing-related expenses like wages, the cost of raw materials, etc. This is especially useful if the exporter has outsourced all or a part of the goods to be shipped.
Lower Rate of Interest
Packing credit charges a lower interest rate than a typical overdraft facility. All the banks may not have standard interest rates for it as it varies depending on the business’ nature, borrowing amount, etc. However, it will surely be lower than various standard loans.
Flexible Terms of Credit
Due to its self-liquidating feature and customized loans, it enjoys flexible terms. The bank allows the exporter to repay the loan after receiving the final payment. And continues to finance all the interim needs of the exporter. Exporters have the flexibility to utilize Packing Credit funds for various purposes related to the export process. These may include purchasing raw materials, manufacturing or processing goods, paying for labor costs, covering transportation expenses, and other associated costs.
Continue reading – Advantages and Disadvantages of Packing Credit
Process of Packing Credit
The following is a step-by-step process of how Packing Credit works:
The exporter applies to a financial institution, such as a bank, for Packing Credit. The exporter submits the necessary documents and information required by the financial institution to assess the creditworthiness and eligibility for the facility.
Evaluation and Approval
The financial institution evaluates the exporter’s application, creditworthiness, and the viability of the export transaction. They assess factors such as the exporter’s track record, financial stability, export order details, and market conditions. If the application meets the criteria, the financial institution approves the Packing Credit facility.
Loan Amount and Terms
The financial institution determines the loan amount based on the exporter’s requirements, the value of the export order, and other relevant factors. They also establish the terms and conditions of the loan, including the interest rate, repayment schedule, and any collateral or security requirements.
Once the Packing Credit facility is approved, the financial institution disburses the funds to the exporter. The funds can be made available in the exporter’s bank account or through other agreed-upon means.
The exporter uses the Packing Credit funds to cover various pre-shipment expenses. These may include purchasing raw materials, processing or manufacturing goods, packaging, transportation, and other costs associated with preparing the goods for export.
The exporter is required to repay the Packing Credit within the agreed-upon timeframe. The repayment schedule and terms are determined during the loan approval process. Repayment can be made in installments or as a lump sum, depending on the terms of the facility.
Once the exported goods are shipped and the export transaction is completed, the exporter receives the proceeds from the sale of goods. The exporter then uses these proceeds to repay the Packing Credit facility. The financial institution may also require the exporter to provide evidence of the export proceeds, such as shipping documents or invoices.
Closure of the Facility
Once the Packing Credit is fully repaid, the facility is closed, and any collateral or security provided by the exporter is released.
Packing credit is essential for pre-shipment finance available to the exporters. Instead of emptying their own liquid reserves, the banks and other lending institutions provide them with a cheap and convenient way to support their supply chains.