Trade finance for MSMEs: letters of credit, bill discounting and packing credit explained

A textile processor in Bhiwandi shipping to the Gulf, an engineering unit in Ahmedabad importing machinery from Germany, a chemicals trader in Vapi buying on 90-day credit: all three run on the same set of bank tools. Trade finance is the name for them. It covers facilities that fund a trade (packing credit, bill discounting) and facilities that secure payment (letters of credit, bills for collection, guarantees).

This guide explains each one in plain terms, with the current RBI rules and the export support available in 2026.

What is a letter of credit (LC), and how does it protect you?

A letter of credit is a bank's undertaking to pay the seller (the beneficiary) when the seller presents documents that comply with the LC's terms, such as invoice, transport document, insurance and inspection certificates. The buyer (the applicant) asks its bank to issue the LC. The seller then relies on the bank's promise instead of the buyer's.

• Sight LC: payment is due when complying documents are presented.
• Usance LC: payment is due later, for example 60, 90 or 180 days after the bill of lading date or after acceptance. That gives the buyer credit while the seller still has a bank's undertaking, which the seller can often discount to get cash early.
• Confirmed LC: a second bank, usually in the seller's country, adds its own undertaking. This is useful when the issuing bank or its country is a risk.
• Inland LC: LCs are common within India too, between a buyer in Pune and a supplier in Surat, for example.

Why UCP 600 matters

Most LCs worldwide are issued subject to the ICC's Uniform Customs and Practice for Documentary Credits (UCP 600). UCP 600 applies when the LC says it does. Under these rules:

• An LC is irrevocable even if it doesn't say so.
• Banks deal in documents, not goods. Payment depends on a "complying presentation".
• Each bank involved gets up to five banking days after presentation to decide whether the documents comply.

Document checking follows the ICC's International Standard Banking Practice (ISBP 821). In practice, discrepancies are the biggest risk for an SME exporter: a misspelt name, a late shipment date or a missing certificate can let the bank refuse payment. Read the LC draft before your buyer opens it, and ask for changes you can't meet.

For the buyer, an LC is a non-fund-based facility. No money leaves your account until payment is due, but the bank sets a limit and usually asks for a cash margin or collateral. That limit sits alongside your working capital limits.

Bills for collection: cheaper, but riskier

Under a documentary collection, your bank sends shipping documents to the buyer's bank, which releases them:

• D/P (documents against payment): only when the buyer pays.
• D/A (documents against acceptance): when the buyer accepts a bill of exchange promising to pay on a future date.

Collections usually follow the ICC's Uniform Rules for Collections (URC 522). They cost less than LCs, but no bank promises to pay. Under D/A in particular, the buyer gets the goods before paying. Use collections with buyers you know well, or alongside credit insurance.

Bill and invoice discounting: getting paid early

When you sell on credit, bill discounting turns the bill into cash now. RBI calls it bill purchase when a bank pays against a sight bill, and discounting when it pays against a usance bill at a discount. RBI's rules require banks to:

• finance only genuine trade bills, never "accommodation bills" without a real sale behind them
• sanction bill limits only after appraising your credit needs, and usually only for regular borrowing customers
• treat bills discounted under an LC as exposure on the LC-issuing bank (unless paid "under reserve"), which is why LC-backed bills are easier to discount

For MSMEs selling to large companies or PSUs, TReDS platforms let financiers bid to discount invoices the buyer has accepted, without recourse to the MSME seller. RBI updated the TReDS rules in June 2026. Our guide for contractors covers how TReDS works.

Export finance: pre-shipment credit (packing credit)

Packing credit is a loan to an exporter to buy, process, manufacture or pack goods before shipment. It is normally given against an LC or a confirmed export order. RBI's rules, now in the consolidated Credit Facilities Directions, say:

• The period is set by your bank, based on how long you need to procure, manufacture and ship.
• It must be adjusted by export documents within 360 days. If not, the advance stops qualifying as export credit from day one. If the export never happens, the bank charges its domestic lending rate plus any penal charges under its policy.
• It is liquidated from export proceeds. Once you ship, the packing credit is repaid by purchasing or discounting the export bill, which turns it into post-shipment credit.
• A "running account" facility is possible. For seasonal raw material or long production cycles, banks may allow packing credit before the LC or order arrives, with orders produced later and bills marked off first-in, first-out.
• Sub-suppliers can share it. Packing credit can be split between an export order holder and the manufacturer or sub-supplier, a common set-up for small units supplying export houses.

Packing credit in foreign currency (PCFC) is available at rates linked to the international benchmark rate for that currency, for up to 360 days. It suits exporters with dollar or euro receivables who want to avoid rupee interest costs, but you carry the currency risk.

Export finance: post-shipment credit

After shipment, banks fund the gap until your buyer pays, by:

• purchasing, discounting or negotiating export bills
• advances against bills sent on collection
• advances against duty drawback receivable from the government

For demand (sight) bills, the finance period is the normal transit period specified by FEDAI. For usance bills, post-shipment credit can run up to 365 days from shipment, though banks are told to push for faster realisation. Export proceeds themselves must be realised within the period FEMA allows. Under RBI's new export-import regulations effective 1 October 2026, that period stays at 15 months for most exports. Interest on rupee export credit is set by each bank's Board-approved policy.

Interest subvention for exporters in 2026

The Interest Equalisation Scheme, which subsidised rupee export credit from 2015, ended on 31 December 2024. It has been replaced by support under the Export Promotion Mission (EPM), approved by the Cabinet in November 2025 with an outlay of ₹25,060 crore for FY 2025–26 to FY 2030–31. Under its Niryat Protsahan sub-scheme:

• Interest subvention of 2.75% on pre- and post-shipment rupee export credit, available from 2 January 2026 to MSME manufacturer and merchant exporters with a valid IEC and Udyam registration.
• Only notified products qualify. A positive list at HS six-digit level covers roughly 75% of India's tariff lines.
• Capped at ₹50 lakh per IEC for FY 2025–26. The government says it will review rates twice a year.
• You need a UIN. Exporters file an intent on the DGFT portal, get a Unique Identification Number for each lending bank and share it with the bank. A DGFT trade notice of May 2026 says that from FY 2026–27 the UIN must be generated within 15 days of disbursal.
• Collateral support with CGTMSE: guarantee cover of up to 85% for micro and small exporters and 65% for medium exporters, up to ₹10 crore per exporter.
• The EPM has also added support for export factoring through registered factoring NBFCs and credit for e-commerce exporters through EXIM Bank.

Scheme details change, so confirm eligibility for your product line with your bank before pricing an order on the subvention.

ECGC cover: insurance for exporters and their banks

ECGC Ltd, the government-owned export credit agency, insures exporters against the risk of buyers or countries not paying. It also insures banks under its Export Credit Insurance for Banks (ECIB) covers, for both packing credit and post-shipment advances. RBI's directions encourage banks to consider ECIB cover, and say the cost of the post-shipment guarantee may be borne by the bank rather than passed on to you. For a first-time exporter or a new overseas buyer, ECGC cover can make a bank more comfortable with the limit.

Import finance: LCs, buyer's credit and supplier's credit

Importers usually rely on:

• Import LCs, sight or usance, issued by an authorised dealer bank against your non-fund-based limit.
• Supplier's credit, where the overseas supplier gives you time to pay, often backed by your bank's LC.
• Buyer's credit, where an overseas bank or lender pays your supplier and you repay it later.

Supplier's and buyer's credit are trade credits under FEMA. They have to fit RBI's limits on tenor and cost, which differ for capital and non-capital goods, so your bank will check this before arranging them. Forward contracts to hedge the currency risk are usually expected.

Bank guarantees in trade

Advance payment guarantees, performance guarantees and standby LCs often sit alongside trade finance, for example when an overseas buyer pays an advance. We explain how guarantees use up limits and margins in our contractors' guide.

Quick comparison

Instrument	Who uses it	Funded or non-funded?	Main purpose
Letter of credit	Buyer (importer)	Non-funded	Assures seller of payment
Bill for collection	Seller (exporter)	Neither (service)	Controls release of documents
Bill / invoice discounting	Seller	Funded	Early cash against credit sales
Packing credit (PC / PCFC)	Exporter	Funded	Fund production before shipment
Post-shipment credit	Exporter	Funded	Fund the gap until buyer pays
Buyer's / supplier's credit	Importer	Funded (overseas)	Credit period on imports

A practical checklist for SME exporters and importers

• Get your IEC, Udyam registration and an authorised dealer (AD Category-I) bank relationship in place before the first order.
• Ask for export credit limits (PC/PCFC and bill limits) at the same time as your regular working capital, with projections that show export orders.
• Generate the EPM UIN on time if your product is on the positive list.
• Read every LC before acceptance for terms you can't comply with.
• Hedge currency exposure. RBI requires banks to assess borrowers' unhedged foreign currency exposure and hold extra provisions or capital against it, so expect questions about your hedging.
• Track export realisation closely. Under the 2026 FEMA export-import regulations, long delays in realisation can restrict your future exports to advance payment or LC terms.

How Biz Corp Solutions helps

We help manufacturers, traders and exporters in Maharashtra, Gujarat and Karnataka put together the right trade finance package: packing credit and bill limits, LC and guarantee limits, alongside working capital and project funding. We prepare the file lenders expect and approach suitable banks, NBFCs and financial institutions. Sanction, limits and pricing are always the lender's decision.