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Financial Institutions, Lecture 02
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. The bank issuing the packing credit will 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. 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. 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.
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