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, the packing credit is also used for financing the working capital and 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 them funds to bridge the gap till the final payment. The bank issuing the packing credit Packing Creditwill usually advance the partial or full proportion of the invoice, depending on the assumed risk. The packing credit is especially very viable for exporters who export goods overseas as it has a more flexible repayment plans than the usual bank loans. The loan can be granted 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 is not very complicated 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

The packing credit has the following features:

Self-liquidating

The Self-liquidating feature is the most significant feature of packing credit. 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 a convenient way to purchase expensive goods or raw materials even if they exceed the set budget.

Covers Manufacturing Expenses

Packing credit also covers the manufacturing – related expenses like wages, a 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 rate of interest as compared to a typical overdraft facility. All the banks may not have standard interest rates for packing credit 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, packing credit enjoys flexible terms. The bank allows the exporter to repay the loan after he receives the final payment and continues to finance all the interim needs of the exporter.

Conclusion

Packing credit is an essential 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.

References:

Last updated on : January 13th, 2018
What’s your view on this? Share it in comments below.

About The Author

Sanjay Bulaki Borad
Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of training100.ru. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

One Response

  1. Rishabh Jain

Leave a Reply

Advantages and Disadvantages of Bank Overdraft
  • Invoice Discounting or Bill Discounting or Purchasing Bills
    Invoice or Bill Discounting or Purchasing Bills
  • How EOQ helps in Inventory Management
    How EOQ helps in Inventory Management?
  • Negative Working Capital
    Negative Working Capital
  • Cash Conversion Cycle
    Cash Conversion Cycle
  • Subscribe to Blog via Email

    Enter your email address to subscribe to this blog and receive notifications of new posts by email.

    Recent Posts

    Find us on Facebook


    Related pages


    maximization of wealthwhen to use incremental modelq tobincumulative preference shareshow do you calculate noireceivable turnovercurrent liability ratiomandatory convertible bondsppe revaluation modelwhat is economic value added evacurrent account with overdraftdefine hypothecatevertical analysis calculationcapital rationing exampledebentures meansdebtors factoringwhat is fictitious assetsirr timing problembenefit cost ratio advantages and disadvantagesusing wacc to evaluate projectspros and cons of activity based costingdefine invoice discountingpvifa calculatordebtor turnover ratioprepaid expenses current assetus gaap on fixed assetscalculate wacccalculate noidebit formulairr and npv relationshipdefine shareholder equityunsecured debenturedirect pay standby letter of credithow to calculate inventory turnsnet income formulastobin's q modelgross profit ratio interpretationtypes of convertible bondsbank overdraft accounting definitiondegree of operating leverage formulawhat is fictitious assetmanagerial accounting break even pointcapitalized lease accountingfinancial leverage wikidividend discount model equationreturn on capital employed definitionexample of journalhow to calculate activity ratioadvantages of capitalisationdefination of irrgrowth stock examplein recording an accounting transaction in a double entry systemperiod cost formulaarbitrage argumentcapital budgeting proposalscalculate cost of debt waccnpv capital budgetingdebenturincremental budgetingexamples of semi variable costsnet cash accrualsgordon valuation modelassumption of eoq modeldebtors ratioreceivables turnover analysisvolume price mix variance analysisdifference between fund flow and cash flow statementmarginal costing definition accountingbank overdraft definedefine current assets and current liabilitiesbenefits of convertible bondsbank account with overdraft facilitydebt equity ratio interpretationcapital lease entriescapitalize vs expenseperpetual non cumulative preference sharesadvantages and disadvantages of breakeven analysisgdr & adrlessee versus lessordifferent theories of dividend policyadvantages of managerial economicstypes of bonds in financial managementnet asset turnover definition