Packing credit is a short-term loan or advance provided to exporters to finance the costs associated with preparing goods for shipment. This includes purchasing raw materials, processing, manufacturing, and packing.
Understanding Packing Credit in Detail
Packing credit, also referred to as pre-shipment finance, is a crucial tool for exporters, especially small and medium-sized enterprises (SMEs), enabling them to fulfill export orders. It addresses the financial gap between receiving an order and actually shipping the goods, which often involves significant upfront costs.
Key Features of Packing Credit
- Purpose: To finance the preparation of goods for export.
- Eligibility: Available to exporters with confirmed export orders or letters of credit.
- Currency: Can be availed in local or foreign currency, depending on the exporter's needs and the lending institution's policies.
- Repayment: Typically repaid from the proceeds of the export bill after shipment.
- Security: Banks may require collateral or guarantees, but often rely on the underlying export order as security.
- Pre and Post Shipment Finance: Packing Credit falls under the Pre-Shipment Finance category.
Benefits of Packing Credit
- Facilitates Export Growth: Allows exporters to accept and fulfill larger orders.
- Improves Cash Flow: Provides working capital to manage expenses before receiving payment.
- Reduces Financial Burden: Lowers the need for exporters to use their own funds or other credit lines.
- Enhances Competitiveness: Enables exporters to offer competitive pricing and delivery schedules.
Example of Packing Credit in Action
Imagine a clothing manufacturer in India receives an export order for 10,000 shirts from a buyer in the United States. To fulfill this order, the manufacturer needs to purchase fabric, pay for labor, and cover packing costs. The manufacturer can obtain packing credit from a bank to finance these expenses. Once the shirts are shipped and the manufacturer receives payment from the buyer, they use those funds to repay the packing credit loan.
Types of Expenses Covered by Packing Credit
Packing credit can cover a wide range of pre-shipment expenses, including but not limited to:
- Purchase of raw materials and components
- Manufacturing and processing costs
- Packing and packaging expenses
- Transportation costs to the port of shipment
- Insurance premiums
How to Obtain Packing Credit
- Secure an Export Order: The first step is to obtain a confirmed export order or letter of credit.
- Approach a Bank: Contact a bank that offers packing credit facilities.
- Submit Documentation: Provide the bank with the export order, financial statements, and other required documents.
- Negotiate Terms: Discuss the loan amount, interest rate, repayment schedule, and any security requirements with the bank.
- Avail the Credit: Once the bank approves the application, the exporter can avail the packing credit to finance the pre-shipment expenses.
Packing credit plays a vital role in supporting international trade by providing exporters with the necessary financial resources to prepare goods for shipment and fulfill export orders efficiently.
