Before you delve into the pros and cons of packing credit, you have to know what is packing credit and how it works. Generally, it is a financial setup between a financial institution and an exporter. It is available as pre or post-shipment of credit. As far as pre-shipment of credit is concerned, it is a financial aid that is used for the procurement of raw material to be processed into finished items and packing them to be readied for export. On the other hand, the post-shipment credit is extended by the bank against an order of export that has already been made. The packing credit facility is available for a period of 180 days along with an extension of ninety days.
The following are the pros and cons of packing credit limit and allow people to decide whether or not they should go for this option.
Easy option of repayment
Several financial institutions offer the facility of packing against the orders of export that are confirmed. They also need a letter of credit that the bank issues for the overseas buyer. Therefore, the yield or earnings from the export orders can be used for repaying the loan. The loan becomes completely liquid and the schedule of repayment is an integral part in the completion of the export order.
The motto of every country is to growth export orders to stay competitive in the world market. However, it can be hard to achieve the target of export orders until sources of finding are made available to the export houses. The financial cost is a part of the product cost as well. Therefore, several countries are rewritten the export policies to let the exporters to get the benefit of packing credit at low rates of interest, which is much lower than the prime rate of lending.
Flexible source of funding
The flexibility that comes with packing credit is high as the banks can provide the funds in the home currency and it can be converted into foreign currency as well. Moreover, the financial institutions also facilitate the exporters to repay the debts along with the profits of another export order. However, the debt repayment via another export order can only be made possible when the products can be exchanged commercially and the order of export belongs to the same country of import.
Comprehensive funding source
Usually, the banks provide the facility of packing credit for the entire process of export from the procurement of raw materials to the finished goods, storage option in the warehouses, and packing. On the whole, the packing credit includes the cost of manufacturing along with the other charges that make the goods suitable for export to the other countries. Therefore, it is an option of full-time credit that can be easily used for any purpose that results in the export of goods. The amount that is granted is based on the FOB value of the letter of credit or export credit that subtracts a certain margin.
Before providing the funds, the banks usually carry out an extensive review at the pre-sanction stage on the exporter and the importer. What they need to obtain from the past records is whether the exporter is genuine and has obtained the license to export. Some of the other aspects they analyze are the profitability of the products, the stability of the country that imports the product from political and economic perspectives. Therefore, the entire process becomes too long and boring for the borrowers.
Compliance and dependence
Often the conventional lenders ask for strong compliances such as the stock statements and verification of the stock and the status reports. There is no doubt that such formalities add to the administrative burden of the borrower. As the process of packing credit depends on the credit letter the banks issue, the bankers often deny to issue the letter to the new importers. Quite naturally, the whole process can fail when a genuine importer does not get the letter of credit from the bank.
Do not forget
When it comes to the tenure of the packing credit, the banks expect the exporters to repay the entire amount within the designated period. If the exporter fails to repay the amount within the tenure, the banks impose penal interest rate. The seller must weigh the pros and cons of the packing credit facility before procuring the amount.