WORKING CAPITAL FINANCE:
Types of Working Capital Financing
Cash Credit / Bank Overdraft
Cash credit or bank overdraft is the most useful type of working capital finance, extensively used by all small and big business houses. It is a facility offered by banks whereby the borrower is sanctioned a particular amount which can be utilized for making his business payments. The limit sanctioned is generally secured by creating charge over property and current assets. The interest is charged to the extent the money is used and not on the sanctioned amount.
Purchase / Discount of Bills
It is another popular service provided by commercial banks for working capital financing. Every firm generates bills in the normal course of business while selling goods to debtors. The seller who requires money will approach the bank with that bill and bank will apply the discount on the total amount of the bill based on the prevailing interest rates and pay the remaining amount to the seller. On the date of maturity of that bill, the bank will collect the money from the debtor.
Bank Guarantee
It is primarily known as non-fund based working capital financing. Bank guarantee is acquired by a buyer or seller to reduce the risk of loss to the opposite party due to non-performance of the agreed task which may be used to repay the money or provide some services etc. In essence, a bank guarantee is revoked by the holder only in case of non-performance by the other party. Bank charge commission for the same and may also ask for security.
Letter of Credit
It is also known as non-fund based working capital financing. Letter of credit and bank guarantee have a very thin line of difference. In the case of a letter of credit, the bank will pay the opposite party as soon as the party performs as per agreed terms. So, a buyer would buy a letter of credit and send it to the seller. Once the seller sends the goods as per the agreement, the bank would pay the seller and collect that money from the buyer.
Some other sources of working capital financing used are inter-corporate deposits, commercial paper, public deposits etc.
Lease Rental Discounting
A property owner earns a fixed periodic rental from their property given on lease to credible companies. With Lease Rental Discounting System, there is an opportunity to get these rentals in a lump sum manner and at attractive discount rates from Banks or NBFCs. These funds can then be utilised to generate further assets, which can contribute to higher returns. These funds can also be utilised for the expansion of their business activities.
Under Lease Rent Discount (LRD) the rent is considered as fixed income over a specified time which is also called as the lease period or the rent period or tenure. The agreement is between the borrower and lender and the major term of repayment is through the rent which is directly deposited with the lender (Bank/NBFC) and not with the borrower. The Borrower’s loan account is credited based upon the rent which is to be collected over the period of lease.
We assist client to get maximum amount of loan under LRD at most competitive interest rate.