Securing an export order is difficult, but arranging the funds to execute it is where many exporters actually struggle. From the moment an order is confirmed to the time goods are shipped, exporters face a working capital gap. During this period, expenses such as raw materials, production, labour, and packaging must be paid upfront, while export proceeds arrive much later.
Pre-shipment credit is designed to bridge this gap. It is a short-term working capital facility offered specifically for export-related activities before shipment. By using this credit, you can prepare and dispatch large orders without straining your own cash reserves or disrupting day-to-day operations.
The Reserve Bank of India continues to prioritise export credit to ensure liquidity for exporters and support trade growth. Pre-shipment credit forms a critical part of this framework.
Continue reading this guide to understand the types of pre-shipment credit available, who qualifies, and how the application process works in practice.
Key takeaways
- Pre-shipment credit helps bridge the cash gap between order confirmation and shipment by funding procurement, production, and packing costs.
- Choosing between pre-shipment and post-shipment finance depends on whether your immediate need is working capital or payment realisation.
- Interest rates on export credit vary by currency, with INR loans linked to domestic benchmarks and foreign currency loans linked to global rates.
- Fees and administrative charges can materially affect the true cost of export credit and should be reviewed upfront.
- Faster payment realisation after shipment improves credit limit rotation and reduces dependency on short-term borrowing.
What Is Pre-Shipment Credit and How Does It Work?
Pre-shipment credit, commonly called packing credit, is a short-term working capital loan that helps you prepare goods for export. Banks extend this facility to finance activities such as buying raw materials, processing or manufacturing goods, and packing them for shipment.
The core role of pre-shipment credit is to bridge the funding gap before goods leave India. Lenders provide it only against a confirmed export order or a valid Letter of Credit (LC). This link ensures the borrowing stays tied to a real export transaction, not general business expenses.
In most cases, the loan gets repaid from the export bill proceeds once the overseas buyer pays. As per guidelines issued by the Reserve Bank of India, banks structure export credit to closely align with shipment timelines and realisation of funds.
Why Is Pre-Shipment Finance Critical for Exporters?
Export orders often arrive before cash does. You must still pay for materials, production, and packaging long before the buyer settles the invoice. Pre-shipment finance fills this gap and keeps operations moving without putting pressure on your day-to-day cash flow.
Key benefits for exporters include:
- Capacity to Fulfil Large Orders: Access to working capital helps you scale production for international orders without dipping into reserves or delaying other commitments.
- Smoother Cash Flow: By funding costs upfront, pre-shipment credit reduces liquidity stress and keeps payroll, vendors, and operations on track.
- Stronger Buyer Terms: When your production costs are covered, you can confidently offer reasonable credit periods to overseas buyers, which improves competitiveness.
- Lower Transaction Risk: During appraisal, banks review the export order and often assess the buyer’s credit profile, reducing the risk of funding orders that may not get paid.
Pro Tip: Choose a credit tenure based on how long production and shipment actually take. This helps you avoid paying extra interest or charges for extending the loan later.
What Are the Different Types of Pre-Shipment Credit?
Pre-shipment credit is not one-size-fits-all. Banks offer it in domestic or foreign currency, depending on how your export cycle works, where you source inputs from, and how you manage currency risk.
Export Packing Credit (EPC)
- EPC is a pre-shipment loan provided in Indian Rupees.
- It works best if you source raw materials or services locally.
- Interest rates are usually lower than regular cash credit limits, especially when exporters qualify for interest subvention under government-supported export credit schemes.
- Repayment happens once export proceeds are realised.
Pre-Shipment Credit in Foreign Currency (PCFC)
- PCFC is availed in currencies such as USD, EUR, or GBP.
- Interest rates track global benchmarks like Secured Overnight Financing Rate (SOFR) or Euro Interbank Offered Rate (EURIBOR), which are often lower than domestic lending rates.
- Since repayment happens in the same currency as export earnings, PCFC reduces exchange rate risk and acts as a natural hedge.
- This option suits exporters with predictable foreign currency inflows.
Advances Against Cheques or Drafts
This facility allows banks to extend short-term finance against cheques or drafts received as advance payments from overseas buyers. It helps you access funds while the payment is still in the clearing or transfer stage, avoiding production delays.
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Pre-Shipment vs. Post-Shipment Finance: What Is the Difference?
| Parameter | Pre-Shipment Finance | Post-Shipment Finance |
| Purpose | Funds the making and preparation of export goods | Supports cash flow while waiting for export payment |
| Timing | After order confirmation, before shipment | After goods are shipped |
| Focus | Working capital for procurement, production, and packing | Financing against export receivables |
| Security | Export order, raw materials, work-in-process, or finished goods | Shipping documents, invoice, bill of exchange |
| Risk Profile | Higher, as shipment and realisation are still pending | Lower, as goods are already shipped |
| Typical Tenure | Short-term, usually up to 180 days | Linked to payment terms, typically upto 180 days |
Who Is Eligible for Pre-Shipment Credit?
Banks follow a clear eligibility checklist before approving pre-shipment credit. If you meet these conditions, access to export working capital becomes much easier.
You are generally eligible if you are:
- A recognised exporter, including manufacturers, merchant exporters, or registered trading houses engaged in international trade.
- Holding a valid Import Export Code (IEC) issued by the DGFT, which allows you to legally export goods or services from India.
- In possession of a confirmed export order or LC from an overseas buyer, establishing a clear payment obligation.
- Compliant with banking and regulatory norms, including not being listed on the RBI’s caution list for unresolved export or import-related defaults.
Pro Tip: Keep your export documents and realisation history updated with your bank to avoid delays during appraisal.
How to Get Pre-Shipment Credit: Step-by-Step Process
Banks follow a fairly standard flow to extend pre-shipment credit. Knowing each stage helps you prepare documents early and avoid delays, from application through repayment.
Step 1: Application and Document Submission
- Submit the export credit application to your bank or authorised dealer branch.
- Share a confirmed export order or Letter of Credit, along with the proforma invoice.
- Submit the required documents, including IEC, recent financial statements, and bank statements.
- Include projections of expected export turnover and shipment timelines to justify the limit requested.
Step 2: Credit Assessment and Sanction
- The bank reviews your repayment track record and overall credit profile.
- It also evaluates buyer risk and destination country exposure.
- Based on this, the bank sanctions a limit, which is the maximum amount you can draw.
- A margin is fixed, meaning a small part of the cost must be funded by you.
Step 3: Disbursement of Funds
Once approved, the bank releases funds either in tranches or directly to suppliers. This ensures the money is used only for export-related expenses. The amount usually covers the Free On Board (FOB) value after excluding the expected profit margin.
Step 4: Liquidation of the Credit
Liquidation means repaying the pre-shipment loan. This often happens by converting it into post-shipment credit after you submit shipping documents. As per guidance from the RBI, exporters must repay within prescribed timelines, typically between 180 and 360 days, using export proceeds.
Interest Rates, Margins, and Costs Involved
The cost of pre-shipment export finance costs is not limited to interest alone. It typically includes three components: interest rates, margin, and fees. Understanding each of these helps you assess the actual cost of funding an export order.
- Interest Rates
For rupee pre-shipment credit, banks usually link interest rates to the RBI repo rate, with an additional spread based on your credit profile and export history. For foreign currency pre-shipment credit, pricing is linked to global benchmarks such as SOFR, which has replaced LIBOR. While foreign currency loans may appear cheaper, exchange rate movements can affect the final cost.
- Margin
Banks generally do not finance the entire export order value. They usually fund around 80–90%, while the exporter contributes the remaining 10–20% from internal resources. This structure ensures shared financial responsibility during the execution phase.
- Fees and Charges
In addition to interest, banks may levy processing fees, documentation charges, and fees for extensions or renewals. These charges vary across lenders and should be reviewed carefully before availing the facility.
Pro Tip: Look beyond the quoted interest rate. Margins and fees can significantly influence your overall working capital cost.
Risks and Challenges in Pre-Shipment Finance
Pre-shipment finance supports growth, but it also brings specific risks that you must manage carefully.
- Production Risk: Delays in sourcing raw materials, labour issues, or capacity constraints can disrupt manufacturing schedules. If goods are not ready on time, shipment deadlines slip and interest costs rise.
- Order Cancellation Risk: An overseas buyer may cancel or defer the order midway. In such cases, the outstanding pre-shipment credit still needs repayment, even if the export does not go through as planned.
- Exchange Rate Risk: For exporters using PCFC, currency movements can affect realisations if cash flows do not align as expected. Sudden volatility may compress margins if not monitored closely.
- Regulatory Risk: Changes in export incentives, duties, or country-specific trade restrictions can alter the cost structure overnight and impact repayment ability.
Best Practices for Managing Your Export Finance
Strong export growth depends on how well you manage export finance across the order, shipment, and payment cycle. A few disciplined habits can reduce costs, improve approvals, and protect margins.
Maintain Accurate Documentation
- Clean Paperwork Keeps Your Credit Running Smoothly.
Keep all invoices, shipping bills, packing lists, and bank realisation certificates properly organised and easy to retrieve. Banks rely on these documents to monitor end use and close pre-shipment credit accounts. Missing or inconsistent records often delay liquidation and can trigger penal interest or closer scrutiny in future applications.
- Plan for Currency and Credit Discipline
A clean credit history plays a direct role in faster sanctions and higher lender confidence. Regular tracking of drawdowns, due dates, and repayments through efficient accounting systems helps you avoid missed timelines and extra interest costs.
If you use PCFC, adopt simple hedging strategies to protect margins from currency swings. Banks and authorised dealers also advise aligning hedge tenors with your shipment and payment timelines, as this reduces mismatch risk and keeps your cash flows predictable.
Streamline Inward Remittances
The faster you receive export payments, the faster you can close your loan.
Delays in inward remittances extend your borrowing period and increase interest costs. Modern tools such as the Razorpay MoneySaver Export Account allow you to receive international payments through local collection accounts, improving speed and visibility. Faster realisation helps liquidate pre-shipment credit on time and is one of the most practical financial tips for exporters looking to control costs.
How Razorpay MoneySaver Export Account Optimises Your Credit Cycle
Managing export credit does not end with financing production. How quickly and efficiently you collect overseas payments has a direct impact on your working capital cycle. The Razorpay MoneySaver Export Account is designed to help exporters receive international payments with lower costs, faster settlement, and simpler compliance, making it easier to close the gap between shipment and cash realisation.
Here’s how it supports a healthier credit cycle:
- Receive International Payments through Local Bank Transfers: The MoneySaver Export Account lets you accept overseas payments via global bank transfer methods such as SWIFT, ACH, SEPA, and FPS. Your foreign clients can pay using their local banking systems, while the funds are credited to your Indian bank account in INR. This removes friction at the payment stage and reduces follow-ups for payment delays.
- No Forex Costs with Transparent Pricing: Traditional international collections often come with hidden currency conversion markups that reduce what you finally receive. With MoneySaver, Razorpay offers transparent pricing and zero forex markup on collections, helping you retain more of your export earnings for day-to-day operations.
- Faster Settlement Improves Cash Flow Predictability: International bank transfers collected through MoneySaver settle faster than conventional routes. Quicker settlements help you shorten receivable cycles, repay post-shipment finance on time, and free up limits for new orders.
- Built-In Export Compliance Support: The account provides automated documentation such as eFIRC for eligible transactions. This reduces manual follow-ups with banks and supports smoother compliance with Indian export and tax requirements.
- Single Dashboard Visibility: All international collections, settlement status, and transaction details are managed through the Razorpay dashboard. This improves tracking, reconciliation, and financial planning across export cycles.
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Conclusion
Pre-shipment credit plays a critical role in helping exporters scale without straining working capital. By funding production and preparation costs upfront, it allows you to focus on execution rather than cash gaps. Choosing between EPC and PCFC depends on your interest cost preference and how you manage foreign currency exposure, making it important to align the facility with your export cycle.
Before applying, assess your eligibility, keep export documents in order, and align credit tenors with realistic shipment timelines. As export cycles become faster and more digital, using modern financial tools to track funding, shipments, and payment realisation can help you close credit on time, reduce interest costs, and maintain long-term banking confidence.
FAQs
1. Is a confirmed export order mandatory for obtaining pre-shipment credit?
Yes. Banks usually require a confirmed export order or a LC as proof of a genuine transaction. However, recognised Status Holder exporters may access a running account facility without submitting an order immediately.
2. What is the main difference between EPC and PCFC interest rates?
EPC rates link to domestic benchmarks such as the repo rate and are generally higher. PCFC rates track international benchmarks like SOFR or EURIBOR, which are usually lower.
3. What happens if I fail to repay the pre-shipment credit on time?
If the loan is not liquidated within the permitted period, typically up to 450 days, it loses export credit status. The bank then applies commercial rates along with penal interest, often retrospectively, as per RBI norms.
4. Can I use pre-shipment credit funds for any business expense?
No. Banks strictly monitor end use. You can use the funds only for export-related working capital, such as raw materials, processing, or manufacturing tied to that order.
5. What does ‘crystallisation’ of a PCFC loan mean?
If an export bill remains unpaid beyond the allowed period, usually 30 days after due date, the bank converts the foreign currency loan into INR at the prevailing exchange rate to limit forex risk.
6. Who is eligible to apply for pre-shipment finance?
Manufacturers, merchant exporters, and trading houses can apply if they hold a valid IEC and are not listed on RBI caution lists.
7. How does receiving payments faster help with pre-shipment credit?
Pre-shipment credit is repaid from export proceeds. Faster payment realisation stops interest accrual earlier, directly reducing your borrowing cost and improving cash flow.
