Working Capital Finance (Short Term Finance)
Working capital facilities are granted for the day to day to operations of the businesses. It’s a short term finance facility and renewed annually. Working capital facility can be grated to manufacturer, trader or service provider.
Fund Based – Cash Credit, Overdraft, Term Loan, Packing Credit
Non Fund Based – Letter of Credit and Bank Guarantee
Cash credit and Overdraft Facility (Fund based)
Cash credit or Overdraft facilities are basically a credit line given to the borrower and the same can be used to run the business operation on day to day basis.
Cash credit lines are granted as overdrafts however, in cash credit the drawing power is determined on the basis of borrower’s stock in trade/raw materials/process. To avail Cash credit facility borrower pledges current business assets such as inventory or receivables. Limit on cash credit is calculated every month and is called Drawing Power. Drawing power is calculated after deducting margin fixed by banks over the stocks and receivables. Borrowers to ensure that the balance outstanding is always lesser than the drawing power for the particular month. The facility is renewed every 12 months and at the discretion of the Banks. This facility is suitable for manufacturer and traders, having higher inventory and receivables.
On the other hand, overdraft facility is a simpler one, wherein the bank allows you to debit your current account below zero, up to a specified limit as per the sanctioned amount. There is no separate drawing power is calculated in overdraft facility and it’s also renewed in every 12 months. This is product is suitable for Service Providers and smaller businesses.
Letter of Credit (LC) Facility and Bank Guarantee (Non-fund based)
It is a type of non-fund based credit facility, wherein a bank issues a letter to the seller guaranteeing that a buyer’s payment will be received by the seller on time for the billed amount. In case the buyer is unable to make payment for the purchase on the particular date, the bank will pay the entire outstanding amount to the sellers.
Letter of credit facility is used in domestic as well as international trades to ensure that sellers receive payment on time by the buyers. This is facility ensures smooth transactions between the buyers and the sellers even they are operating in different countries and do not know each other.
Bank Guarantee on the other hand is a Guarantee issued by a scheduled bank on behalf of the service providers or suppliers to complete a work or supply as per the terms. In case the work has not been completed or the specified supply is not done within the time line, the bank pays the guarantee amount to the beneficiary. Thus a work or a supply is ensured. This facility is normally used for Government Contracts and supplies.