Pre-shipment Finance or Packing Credit | Trade Samaritan

Pre-shipment Finance or Packing Credit

Trade finance may come in the form of secured or unsecured loans or lines of credit from banks or financial institutions. Pre-shipment financing is especially important to smaller enterprises because the international sales cycle is longer than the domestic sales cycle.

There are two basic forms of finance of International trade transactions: import finance and export finance. Both can be granted in the currency of the exporter or in any other fully convertible currency agreed by both parties i.e. the borrower and the lending institution. In the 2nd case i.e. in the currency other than the exporters/importer’s home currency, the borrowing company assumes certain risks as to the difference in exchange rates. However, it can also profit from trading in another currency if there is a rise in the value of the foreign currency.

The most important feature of trade finance is its self-liquidating nature.

We shall be discussing the benefits of this characteristic in context of Pre-shipment finance.

Pre-shipment finance is an export finance which is also known as the Packing credit. Pre-shipment finance is granted by banks and financial institutions to the seller or exporter to facilitate manufacturing of goods. Pre-shipment finance assists the exporters to procure requisite factors of production such as Land, Labor, Raw material and Capital. Importers are always reluctant to make advance payments as advance a payment are risky, in such a scenario packing credit facility comes to the rescue and support the supply chain of the exporting companies. The lending bank generally advances from 50 to 100 per cent of the invoice or the transaction value, depending on the perceived risk.

Pre-shipment financing can be as funding for several activities to fulfill an export order such as:

  1. Manufacturing
  2. Processing
  3. Packing
  4. Marketing
  5. Transportation/Shipping

Pre-shipment finance requires simple documentation but needs a proof of an export order like a Purchase order or an export letter of credit.

Banks and financial institutions may have their internal procedures such as buyer verification, scrutiny of the export letter of credit or the purchase order to confirm the authenticity of the transaction. The process flow of Pre-shipment finance too is as simple as its documentation.

Preshipment finance process flow

Pre-shipment finance is self liquidating in nature. It gets liquidated against export proceeds or can be converted into post shipment after the shipment has taken place. Self-liquidating nature is beneficial to  the borrowers who are small sized with under capitalized businesses. Lending institutions have the guarantee of payment as they have the right to apply the export proceeds to liquidate their outstanding assets before passing on the proceeds to the exporter. This makes trade finance less riskier than other loan instruments available in the market such as working capital loan.