Overview
Pre-shipment financing, often known as packing credit, aids exporters with short-term operating capital to fulfil export requirements (i.e. purchasing raw material, production and shipment costs). The loan amount is either secured against an irrevocable Letter of Credit or a verified export order. It is essential for exporters to fulfil production schedules, effectively manage inventories, and accomplish international commitments without facing liquidity constraints.
Although, a large number of applications face rejection due to minor procedural, documentation, and regulatory errors. This article looks at the most common and recurring problems that obstruct the acceptance of Packing Credit applications, as well as how to avoid them.
Top 10 Mistakes and How to Avoid Them
Before looking at the specific errors, it is important to know that banks review packing credit applications very closely. Small loopholes, like, missing documents, unclear cost details, or weak communication, can delay or reduce approval chances. By understanding these common mistakes in advance, exporters can improve their chances of getting packing credit quickly and smoothly.
1. Incomplete or Incorrect Export Documentation
Assuming that all banks follow uniform criteria is a common misconception. Banks have different regulations around documentation checklists, LC scrutiny standards, collateral expectations, margin requirements, and post-disbursement monitoring. Incomplete submissions, needless corrections, and longer approval times are frequently the results of not understanding a particular bank’s policies.
How to Avoid it –
In order to prevent this, exporters should make themselves aware regarding the bank documentation requirements, eligibility criteria, margins, and monitoring mechanisms before sending formal applications. Seek a formal checklist and clearing doubts in advance helps exporters to ensure it meets the bank’s internal compliance measures. This proactive strategy reduces delays and increases the likelihood of timely approval.
Tips to Avoid Packing Credit Application Mistakes
2. Requesting Higher Working Capital Than Required
Submitting an inflated amount as a loan requirement without proper justification signals financial mismanagement or potential fund diversion. Banks evaluate an applicant’s capacity to utilize finances efficiently, and excessive requests indicate worries concerning operations efficiency, sales accuracy, and repayment abilities.
How to Avoid it –
Hence, it would be a wise decision to submit a detailed copy of cost analysis specifying all the costs involved in production and shipping including timelines. The requested packing credit amount must be directly linked to the value and requirements of the confirmed export order. Clearly documented cost justification provides banks with confidence in the feasibility of the request and strengthens the applicant’s credibility.
3. Shipment Delays and Late Submission of Export Bills
Packing credit is meant to be liquidated through export proceeds or submission of export bills within a stipulated time frame. But, lacking timely export of goods or failing to deliver export related paperwork could affect the total borrowing cost, invite penal charges, and lower credit score.
How to Avoid it –
To achieve this, exporters should create an internal mechanism to oversee post-shipment functions, preparedness of documentation, and export deadlines. Promptly submitting export bills after shipping guarantees adherence to bank deadlines, avoiding fines and preserving a favourable credit profile.
4. Failure to Manage Forex Exposure
Foreign exchange fluctuations can significantly affect export profits. Many exporters overlook hedging mechanisms or fail to anticipate currency movements, resulting in reduced realisation of export proceeds. In severe cases, forex losses can hinder the ability to repay packing credit on time.
How to Avoid it –
In order to avoid any issues, exporters should consider collaborating with the bank forex advisory to comprehend currency trends and risk mitigation tools. Currency options, forward contracts, and hedging techniques offer protection against unfavourable rate changes. A planned forex management plan ensures consistent revenues, better financial planning, and easier payback of packing credit.
5. Lack of Clear Production, Procurement, and Shipment Timelines
Banks require exporters to demonstrate operational readiness. Lenders may dispute exports on time for applicants failing to adequately explain procurement cycles, production phases, quality assurance schedules, or estimated shipment dates.
How to Avoid it –
Before applying for packing credit, the exporter should create a detailed functional schedule that specifies every phase, through raw material purchase to manufacture, assessments, shipping, and final export. This schedule provides the bank with certainty of the exporter’s preparedness and decreases perceived risk, allowing for quicker clearance.
6. Poor Communication with the Bank
After submitting their paperwork, many exporters think the procedure will go forward on its own. Failure to notify the bank concerning modifications i.e. order amendments, export date, LC corrections, or operational disruptions could create confusion, stretch approval time or create regulatory difficulties.
How to Avoid it –
Thus, it is critical to maintain reliable and open communication with the financial institution. Exporters should promptly notify the lending institution pertaining to the logistics or export order. Timely communication ensures alignment, fosters trust, and significantly boosts the efficiency of loan management and supervision.
7. Misuse of Packing Credit for Non-Export Purposes
Using packing credit funds for domestic business, settling unrelated debts, or non-export-related transactions is a serious violation of banking and regulatory guidelines. Maintaining purchase invoices, supplier records, and utilisation statements helps demonstrate compliance during audits. Proper fund management protects the exporter from legal complications and maintains good standing with the bank.
How to Avoid it –
All banks actively monitor end-user behavior, and any exploitation can result in fines, the loss of financing facilities, and lasting reputational harm. Thus, exporters must verify that packing credit is only utilized for export-related sourcing, manufacturing, logistics, and packaging charges.
8. Ignoring Buyer Creditworthiness and Skipping Credit Insurance Protection
Exporters occasionally assume that all foreign buyers are reliable, ignoring the risk of payment default. Working with new or financially unstable buyers without insurance can jeopardise the exporter’s ability to repay packing credit.
How to Avoid it –
Thus, borrowers should utilize credit insurance products such as Export Credit Guarantee Corporation of India (ECGC) or private buyer-insurance policies, especially for large-value or high-risk buyers. These instruments protect against default, improve negotiation power, and enhance the bank’s confidence in extending packing credit facilities.
9. Applying Without Sufficient Export Preparedness or Operational Readiness
New exporters often apply for packing credit without demonstrating adequate export knowledge, operational capacity, or industry preparedness. Banks are reluctant to provide pre-shipment financing due to this lack of preparedness.
How to Avoid it –
Presenting a clear export plan with capacity details, buyer communication, and process documentation helps reassure banks of operational readiness. It should lay a solid basis by undergoing exporter training, engaging with Export Promotion Councils (EPCs), forming supplier relationships, and undertaking small trial shipments.
10. Overlook Regulatory and Compliance Requirements
Many exporters overlook the government guidelines or export control rules. They may take the bank compliances lightly. All these are pitfalls that can delay, penalise or even lead to rejection of the packing credit application.
How to Avoid it –
Exporters should stay updated on all relevant regulatory requirements, including customs, foreign trade policies, tax obligations, and licensing rules. Consulting banking experts, Like Bankkeeping, to avoid banking compliances related mistakes can lead to quicker processing and better terms for packing credit.
Conclusion
Therefore, packing credit is an instrumental tool for exporters helping them to fulfil export orders timely and in an economic manner. Frequent errors/inconsistencies in the documents, lack of cost justification, inability to maintain legal compliance or avoiding financial transparency can all have a detrimental impact on credit eligibility.
Nonetheless, implementing strong internal controls, adhering to regulatory standards, keeping necessary records, and regularly communicating with the bank can considerably increase the possibility of Packing credit approval.
We at BankKeeping are a team of specialized professionals who can help your business detect anomalies and excessive interest charges on your packing credit in foreign currency (PCFC). BankKeeping is a FinTech SaaS platform designed specifically for businesses that borrow. Rather than catering to banks, it helps borrowers gain transparency, control, and a powerful way to optimize their banking costs. To know more, book a demo today. We can help you reduce borrowing costs, Understand your sanction letter and decode the hidden covenants, negotiate better terms and even prepare regular reports like CMA data etc.
FAQs
What is packing credit?
Packing Credit/Pre-shipment Finance, is a short-term working capital loan granted to export businesses by financial institutions to fuel their export needs.
Who is eligible for packing credit?
Any business/SME/exporter, with a valid Importer Exporter Code (IEC) and a confirmed export order from a foreign buyer or an irrevocable L/C issued by the buyer’s bank can avail packing credit.
Can packing credit be used for domestic business or non-export activities?
No. Packing credit must be used strictly for export-related activities such as procurement, manufacturing, packaging, and logistics. Misuse can lead to penalties and withdrawal of credit facilities.
How is packing credit repaid?
It is repaid from export proceeds once the foreign buyer settles the payment. Delays in repayment may attract penal interest.
Why is forex risk management important for packing credit?
Since export proceeds are received in foreign currency, fluctuations in exchange rates can reduce profit margins. Hedging tools like forward contracts, currency options, and bank forex advisory services help minimise risk.
How can exporters avoid rejection of packing credit applications?
Exporters can avoid packing credit rejections by submitting complete and accurate documents, requesting only the working capital they genuinely need, demonstrating clear operational readiness, maintaining open communication with the bank, and strictly following all compliance and repayment requirements.
Can first-time/new exporters apply for packing credit, and what do banks look for before approving it?
Yes, but banks require proof of export readiness, including production capacity, reliable suppliers, basic export knowledge, and compliance adherence. Joining EPCs and completing export-training programs can help strengthen \credibility.