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What is packing credit: How does it work for exporters?
Packing credit is a type of pre-shipment and post-shipment finance that helps exporters fulfill their orders. Learn more about its process, types, and features in this blog.
Packing credit is a crucial form of pre- and post-shipment finance that provides exporters with upfront funds to fulfill orders efficiently. It also allows exporters to offer favorable payment terms to buyers, such as extended credit periods or discounts for early payment. This blog delves into the process, types, and features of packing credit, highlighting its significance in international trade.
What is export packing credit?
Export packing credit is a short-term financing option offered by banks and other financial institutions to exporters. While packing credit is commonly referred to as pre-shipment finance, it covers a wide range of expenses throughout the export process and is typically repaid when the goods are delivered and the buyer pays the exporter.
Export packing credit helps finance various business expenses, particularly the purchase, processing, manufacturing or packing of goods prior to shipment. It can also include expenses to cover raw materials, wages, and post-shipping expenses like storage and transportation costs. This credit is especially beneficial for small businesses which often struggle to secure necessary funding at different stages of the export process.1
Export packing credit helps finance various business expenses, particularly the purchase, processing, manufacturing or packing of goods prior to shipment. It can also include expenses to cover raw materials, wages, and post-shipping expenses like storage and transportation costs. This credit is especially beneficial for small businesses which often struggle to secure necessary funding at different stages of the export process.1
How does packing credit work and how to apply for it?
Here is a brief overview of the process of securing packing credit:
Application
After obtaining a confirmed export order, the exporter can submit an application for packing credit to a bank or a financial institution. The application should include necessary company documents along with details of the export order, such as the nature of goods, the amount of credit required, and the purpose.
Verification
The bank or financial institution will evaluate the credibility of the submitted documents and determine the credit amount accordingly.
Loan management
For multiple export orders, banks may create separate loan accounts and release funds in stages based on expenses.
Interest and fees
The exporter is required to pay interest on the packing credit until the full amount is repaid as well as any fees associated with the transaction.2
Types of packing credit
There are two common types of packing credit:
Pre-shipment packing credit:
Pre-shipment packing 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:
Post-shipment packing 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
Some key features of packing credit are as follows:
Short-term financing
Packing credit is generally a short-term loan and is repaid according to the export cycle. This enables exporters to refinance the credit quickly upon receiving customer payments, minimizing long-term debt impacts.
Competitive interest rates
Packing credit is offered at low interest rates by banks and financial institutions, making it attractive to exporters. Interest rates may vary based on the credit market, the lender, and the exporter’s creditworthiness.
Flexible repayment terms
Packing credit allows exporters to repay the amount in instalments according to a set schedule.4
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 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 have all necessary export documents.5
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 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 have all necessary export documents.5
Documents required for export packing credit
Exporters are required to furnish specific documents to secure export packing credit. Some of the key documents include:
● Export order:
Exporters have to ensure they present a confirmed export order from an importer or buyer. This document can serve as evidence of the compliance of the exporter and the authenticity of the transaction.
● Letter of credit (LC):
A letter of credit is a document that is provided by the importer’s bank to assure payments to the exporter. This offers confidence to the bank or any financial institution that the exporter will be paid after satisfying the conditions of the export order.
● Packing list and invoice:
A detailed packing list and an invoice with the description of the goods to be shipped are necessary. These documents enable the bank or financial institution to establish the nature of the shipment and its worth.
● Bill of lading and insurance cover:
A bill of lading serves as a receipt for shipped goods and a contract between the exporter and carrier. It is crucial for verifying shipment when applying for packing credit. An insurance cover note is also essential, providing proof that the goods are insured against loss or damage during transit.6
Interest rates on export packing credit
Export packing credit interest rates vary by bank and are generally lower than other forms of commercial credit. They depend on factors like the lending institution, the exporter’s credit rating, and specific credit features. Exporters should compare rates from multiple banks to secure the best deal. Additionally, processing fees may apply and can vary based on the amount credited.7
Packing credit vs letter of credit
Packing credit
Packing credit is a pre- and post-shipment finance facility that provides working capital to exporters to cover the costs of producing and shipping their goods.
Packing credit usually provides necessary funds upfront for exporters to manage their operations.
Letter of credit
A letter of credit is a financial instrument guaranteeing payment to the seller from a bank once the goods are shipped and the necessary documentation is submitted.
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.
What is the packing credit limit?
The packing credit limit is defined as the maximum amount of pre-shipment credit that is available to an exporter by a banker or financial institution, depending on their credit standing and the value of their confirmed export order.
Published on July 29, 2023.
Sources:
1. https://www.bajajfinserv.in/export-packing-credit’
2. https://www.credlix.com/blogs/how-does-packing-credit-work-in-export
3. https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=302
4. https://www.bajajfinserv.in/export-packing-credit
5. https://www.bajajfinserv.in/export-packing-credit
6. https://www.idbibank.in/packing-credit.aspx
7. https://www.bajajfinserv.in/export-packing-credit
8. https://www.trade.gov/letter-credit
Sources:
1. https://www.bajajfinserv.in/export-packing-credit’
2. https://www.credlix.com/blogs/how-does-packing-credit-work-in-export
3. https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=302
4. https://www.bajajfinserv.in/export-packing-credit
5. https://www.bajajfinserv.in/export-packing-credit
6. https://www.idbibank.in/packing-credit.aspx
7. https://www.bajajfinserv.in/export-packing-credit
8. https://www.trade.gov/letter-credit
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*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.
*Map not to scale. The map has been used for design and representational purpose only, it does not depict the geographical boundaries of the country. These do not conform to the external boundaries of India recognized by the Survey of India.
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