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What is packing credit?

Packing credit is a type of pre-shipment finance that helps exporters fulfil their orders. Learn more about its process, types and features in this blog.

By having access to the necessary funds upfront, exporters can offer more favorable payment terms to importers, such as longer credit periods or discounts for early payment. This is where, packing credit, a form of pre shipment finance comes in.

What is packing credit?

Packing credit refers to a type of pre-shipment finance that is extended to exporters by banks and other financial institutions. It is a short-term credit that is typically repaid once goods are shipped and payment is received from the importer or customer. Packing credit can be used to finance a variety of expenses, including purchase of raw materials, labor costs, packaging costs, and transportation costs. The purpose of packing credit is to help exporters cover their expenses related to production, processing, and packaging of goods before they are shipped to the importer. This form of credit is particularly useful for small and medium-sized enterprises (SMEs) that may not have access to the necessary funds to cover these expenses².

How does packing credit work?

Here is how packing credit works:

Application

The exporter submits an application for export packing credit to a bank or a financial institution. The application must include information about nature of goods being exported, amount of credit required, and purpose for which credit will be used.

Credit assessment

The bank or financial institution evaluates the creditworthiness of the exporter and level of risk involved in the transaction. Factors such as exporter’s credit history, quality of goods being exported, and creditworthiness of the importer are taken into consideration.

Approval

If the application is approved, the bank or financial institution will extend the necessary funds to the exporter in the form of export packing credit.

Repayment

A packing credit is a short-term credit that is typically repaid once the goods are shipped and payment is received from the importer. The exporter is required to provide proof of shipment and payment in order to repay the credit.

Interest and fees

The exporter is required to pay interest on the packing credit as well as any fees associated with the transaction.

Types of packing credit

There are two common types of packing credit²:

Pre-shipment packing credit:

This type of credit is provided to exporters before the goods are shipped. It helps to cover the costs associated with production, processing, and packaging of goods. The credit can be used to purchase raw materials, pay for labor costs, and cover transportation expenses.

Post-shipment packing credit:

This type of credit is provided to exporters after the goods have been shipped. It helps to cover working capital requirements of the exporter until payment is received from the buyer.

Features of packing credit

Here are two key features of packing credit:

Short-term credit:

Packing credit is a short-term credit that is typically extended for a period of up to 180 days. This makes it an ideal tool for managing cash flow during the production and shipment of goods.

Customized credit:

The amount of credit that is extended will depend on a number of factors, including the creditworthiness of the exporter, the nature of the goods being exported, and the level of risk involved. This flexibility allows exporters to access the necessary funds to cover their export-related expenses and helps to support their growth and success in the global marketplace.

Eligibility criteria for packing credit

The eligibility criteria for packing credit may vary depending on the policies of the lending institution. Below are a few common factors considered:
1. The exporter must have a valid export order or a letter of credit from a reputable importer.
2. The exporter must be registered with the relevant authorities, such as the Reserve Bank of India or the Directorate General of Foreign Trade (DGFT).
3. The exporter must have a good credit rating and a positive track record of exporting.
4. The exporter must provide a detailed plan outlining how the funds will be used and repaid.
5. The exporter must have adequate collateral to secure the credit.

Packing credit vs Letter of Credit

1. Packing credit is a pre-shipment finance facility that provides working capital to exporters to cover the costs of producing and shipping their goods. On the other hand, a letter of credit is a financial instrument that provides payment security to the parties involved. It is a guarantee from a bank that payment will be made to the seller once the goods are shipped and the required documentation is provided.

2. While packing credit provides necessary funds for exporters to produce and ship their goods, a letter of credit provides payment security for both the importer and exporter.

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Frequently Asked Questions

Who can avail packing credit?

Exporters and parties involved in trade can avail packing credit.

Who can provide packing credit to exporters?

Banks and financial institutions can provide packing credit to exporters.

How to calculate packing credit limit?

Packing credit limit is usually calculated based on the exporter's past performance and creditworthiness.

Can packing credit be liquidated?

Yes, packing credit can be liquidated once the goods are shipped and payment is received.

What is the packing credit interest rate?

The interest rate of packing credit depends on the bank and the exporter’s creditworthiness.

Published on July 29, 2023.

Sources:
1. https://www.eximbankindia.in/Products/Pre-Shipment-Finance.aspx
2. https://www.investopedia.com/terms/p/packingcredit.asp
3. https://www.rbi.org.in/Scripts/FAQView.aspx?Id=81
4. https://www.eximbankindia.in/Assets/Dynamic/PDF/Publication/ed6d01dc-7a71-4c3f-977d-968fa8a7d34a.pdf
5. https://www.investindia.gov.in/team-india-blogs/packing-credit-exporters

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What is packing credit?

What is packing credit?

How does packing credit work?

Application

Credit assessment

Approval

Repayment

Interest and fees

Types of packing credit

Pre-shipment packing credit:

Post-shipment packing credit:

Features of packing credit

Short-term credit:

Customized credit:

Eligibility criteria for packing credit

Packing credit vs Letter of Credit

Amazon Global Selling: Your passport to easy exports and shipping from India

Frequently Asked Questions

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