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.
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.
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.
Continue reading – Advantages and Disadvantages of Packing Credit
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.