In intercontinental trade, importers are circumspect about making advance payments to their exporters for several reasons.

This, however, may lead to a shortage of funds for the exporter to procure the raw materials or pay the labor cost of manufacturing. Lack of working capital may lead to the deal not materialising.

Insufficient financing arrangements and liquidity related concerns are among the top challenges cited by exporters. This is not exactly ideal as sound businesses with great potential may meet an early unwarranted demise.

Due to the funding challenges, a number of loans have been invented. Packing Credit is one of them.

Packing Credit in export

This is also called a Pre-shipment Credit is a loan granted to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment.

The biggest pro of this type of funding is that it charges a lower rate of interest when compared to a typical overdraft facility. Every bank may not have a standard interest rate for packing credit. It differs based on the nature of the business, borrowing amount, etc.

The exporter borrows the amount, meet their capital needs and return it with interest once the buyer makes the full payment which would take an average of 180 days.

Disbursing the Packing credit Finance.

Banks may release Pre Shipment Finance either in lump sum or in stages based on the requirements of the exporter. Bank maintains separate account for Packing Credit to monitor the period of sanction of such pre shipment loan and end use of amount.

The various stages of processing, manufacturing is monitored by a bank by maintaining a separate account to ensure that the outstanding balance in accounts are adjusted by transfer from one account to the other and finally by proceeds of relative export documents on purchase, discount.

Why is packing credit important? When a country's export sector grows, automatically the economy blossoms. Export is such a consequential sector and it is natural for the government of the day to put up measures to enable and accredit it in so that no intercontinental business fails to materialize because of inadequate fund on either side, hence the development of packing credit funding.

This assurance enables the exporters to be able on the lookout for more exports.

Export packing credit eligible

When the export gets a confirmation of the order from a customer or an Irrevocable letter of Credit is (ILOC), then they automatically become eligible to apply for the funding with the banks that provides such funds.

(LC) is a document that is most commonly sought for international trade transactions, especially when the buyer and the seller are unfamiliar with one another.

Irrevocable Letter of Credit (ILOC) helps facilitate trade from the point of view of the seller. This document acts a guarantee that the agreed amount will be received from the buyer.

Attributes of packing credit

Self-Liquidation: Packing credit enjoys the self-liquidating feature since the repayment is guaranteed based on a confirmed export order. It is a reliable facility where goods are converted into cash in the short run. The goods are converted via the sale.

Low rate of interest rates: Compared to other types of funding packing credit enjoys the advantage of lower rate of return. This gives the exporter the peace of mind because they are sure they will still make a sale even after paying the interest.

Exporter friendly terms of credit.: The terms for Packing credit loans are flexible, with banks asking for repayment once the buyer makes the final payment to the supplier. This is due to its self-liquidating feature, which makes it risk-free.

Great way to finance the working capital requirements.: Manufacture related costs are raw materials, wages and salaries machinery and getting the goods to the intended client. This facility takes care of all the manufacturing of these expenses.

Types of packing credit: Extended Packing Credit Loan, Secured Shipping Loans, Advances against Back-to-Back Letter of Credit and Red or Green Clause Letter of Credit.

Pre-shipment Credit in Foreign Currency (PCFC)

This is a form of pre shipment finance to exporters at internationally competitive rates. The lending bank lends in foreign currency. The exporter is expected to return the funds in the same currency he/she was given.

How to get Packing Credit

The procedure of securing the funds from the bank is quite simple and straight forward as long as the exporter has all the necessary documents.

Step 1: When the exporter gets the confirmation from the client, he/she should contact the bank so as to initiate the formal process of application. While this is the initial process the relevant documents ought to be presented for credibility purposes. These documents are key to the bank.

Step 2: When the credibility is established by the bank, it then calculates the amount the exporter qualifies. This is usually a function of net clients order worth. The banks have a packing credit limit of up to appx 0.2 to 0.25% of your total annual sales on your balance sheet.

Step 3: In the event that the exporter has more than one export order, the funding unit shall issue different loans accounts for each and every order. The bank starts charging the interest until the repayment is done for the full amount.

Step 4: Banks ask for phase-wise information about your expenditure and disburse the amount accordingly in parts. The above procedure might differ depending on different banks.

CPA. Makau M. N is a finance specialist at Airwagon Cargo Movers Ltd

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