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Working Capital Financing

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mayank mishra
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11 views

Working Capital Financing

Uploaded by

mayank mishra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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WORKING CAPITAL FINANCING

WORKING CAPITAL
 Capital required to carry out day to day operations of an organization
 Gross working capital = Current Assets (CA)

 Net working capital = (Current Assets) – (Current Liabilities(CL))

 Working capital gap = CA – (CL other than bank borrowing)


CASH CREDIT
 Bank allows the borrower to raise funds upto a certain limit against securities
generally the receivables or inventories.
 The banks sanction a particular limit and borrower can withdraw and make
other transactions any number of times but within the overall permitted limit.
OVERDRAFT
 A customer is allowed for a temporary period to withdraw from the account
exceeding the permitted arrangement.
 This is treated as a loan and repayable with interest in a short period

 Regular overdraft limit is fixed on the basis of security or the financial worth
of the borrower
Cash Credit Overdraft
The interest rate is lower as compared to Overdraft. (only charged on the
The interest rate is comparatively higher
withdrawn sum)

Overdraft amount can be availed based on credit history, relationship with the
Cash credit loan can be availed on hypothecation of stocks and inventory bank, and investments like FDs, insurance policies and your relationship with the
institution

Cash Credit should be availed for business purposes, only An overdraft can be used for any purpose, including business-related requirements

The loan amount is based on the volume of stocks and inventory The loan amount is based on financial statements and security deposit

Overdraft facility is availed on the existing account of the applicant (account


To avail Cash Credit, a new account needs to be opened
holder)

An overdraft facility can be availed for shorter tenure like a month or quarter,
Cash credit loan availed generally for 1 year
maximum of 1 year

Cash credit loans can be availed by individuals, retailers, traders,


manufacturers, distributors, companies, partnerships, sole An overdraft facility can only be availed by account holders of the respective bank
proprietorships, LLPs, etc.

Cash credit is sanctioned based on the business performance and market Overdraft is sanctioned based on financial statements and credit history and your
situation relationship with the institution
NON FUND BASED FINANCING
 The Non-Fund based Credit Facilities are nature of promises made by Banks
in favour of a third party to provide monetary compensation on behalf of
their clients, where the lending bank does not commit any physical outflow
of funds.
 LC

 Bank Guarantee
LETTER OF CREDIT (LC)
 ​ letter of credit is a letter from a bank guaranteeing that a buyer's payment
A
to a seller will be received on time and for the correct amount. In the event
that the buyer is unable to make payment on the purchase, the bank will be
required to cover the full or remaining amount of the purchase.
 Due to the nature of international dealings, including factors such as distance,
differing laws in each country, and difficulty in knowing each party
personally, the use of letters of credit has become a very important aspect of
international trade.
 Banks typically require a pledge of securities or cash as collateral for issuing a
letter of credit. Banks also collect a fee for service, typically a percentage of
the size of the letter of credit. The International Chamber of Commerce
Uniform Customs and Practice for Documentary Credits oversees letters of
credit used in international transactions.
GUARANTEE
A bank guarantee is a guarantee from a lending institution ensuring the liabilities of a debtor will be met.
In other words, if the debtor fails to settle a debt, the bank covers it. A bank guarantee enables the
customer, or debtor, to acquire goods, buy equipment or draw down loans, and thereby expand business
activity. A bank guarantee is a lending institution’s promise to cover a loss if a borrower defaults on a loan.
The guarantee lets a company buy what it otherwise could not, helping business growth and promoting
entrepreneurial activity.

Different Types of Bank Guarantees:-


A bid bond prevents companies from tendering bids and not accepting or executing the awarded contract.
A performance bond serves as collateral for the buyer’s costs incurred if services or goods are not provided
as agreed in the contract.
• An advance payment guarantee acts as collateral for reimbursing advance payment from the buyer if the
seller does not supply the specified goods per the contract.
• A warranty bond serves as collateral ensuring ordered goods are delivered as agreed.

• A payment guarantee assures a seller the purchase price is paid on a set date.

• A credit security bond serves as collateral for repaying a loan.

• A rental guarantee serves as collateral for rental agreement payments.

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