WORKING CAPITAL FINANCING

Presented By : Aastha Dutt Sharma , Aakriti , Abhijeet Singh, Pooja Srivastva , Sandeep Yadav

27.1 ACCRUALS

• These are what the firm owes to its employees and to the government.

• Wages and taxes are major accruals.

• Accruals vary with the level activity of the firm. It increases with expansion and decreases with contraction.

• They are regarded as “free” source of financing as no interest paid by firms on it.

27.2 TRADE CREDIT

• It represent the credit extended by the suppliers of goods & services.

• Important source of finance.

• 25 % to 50% short –term financing.

OBTAINING TRADE CREDIT

• Confidence of suppliers.

• Suppliers looks following for granting credit

• a ) Earning record over a period of time.

• b) Liquidity position of the firm

• c) Record of payment.

CULTIVATING GOOD SUPPLIER RELATIONSHIPS

• Honoring commitment is very important.

• Broken promise erode confidence.

COST OF TRADE CREDIT

• It depends on the term of credit offered by the supplier.

• The cost of credit is very high beyond the discount period.

• If the firm is unable to avail of the discount for prompt payment, it should delay the payment till the last day of the net period.

WORKING CAPITAL ADVANCE BY COMMERCIAL BANKS

• It represents source of financing current assets.

• The following are this source of finance:

• a) Application and processing

• b)Sanction and term and condition

• c) Forms of bank finance

• d) Nature of security

• e) Margin amount

APPLICATION AND PROCESSING

• Application forms are filled for seeking advances.

• Different types of application form for different categories of advances.

• The application is processed by the branch manager.

SANCTIONS AND TERM AND CONDITION

• Once the application is processed it is put up for sanction to the appropriate authority.

• Along with the sanction of the advances bank specifies the terms and conditions , which are as follows:-

• a) Amount of loan or maximum limit of advance

• b) Nature of the advance

• c) Period for which the advance will be valid

• d) Rate of interest applicable

• e) Primary security to charged.

CONTINUE

f) Insurance of the security

g) Detail of collateral security , if any

h) Margin to be maintained

i) Other obligations on the part of the borrower.

• These banking practices to incorporate important term and conditions on stamped security documents to be executed by the borrower

FORMS OF BANK FINANCE

• Commercial banks provide working capital advance in three primary ways :-

1. Cash Credit / Overdrafts

2. Loans

3. Purchase / Discount of bills

CASH CREDIT/OVERDRAFTS

• Under this arrangement , a predetermined limit for borrowing is specified by bank.

• The borrower can draw as often as required but not exceeding the limit.

• Interest charged only on the running balance.

• This facility is for a period of one year

• Minimum charge is payable for availing the facility.

LOANS

• These are advances of fixed amount which are credit to the current account.

• Borrower is charged with interest on the entire loan amount.

• Loans are payable either on demand or in periodical installments.

PURCHASE/DISCOUNT OF BILLS

• Commercial Bills : A bill arise out of a trade transaction.

• Seller of goods draws the bill on the purchaser

• Bill may be either clean or documentary.

• Accommodation Bills : A bill created to raise short-termed funds and not backed by trade transaction.

LETTER OF CREDIT

• It is an arrangement where a bank helps its customer to obtain credit from its suppliers.

• Under this credit is provided by the supplier but risk is assumed by the bank.

• It is indirect form of financing.

SECURITY

• Bank seeks security either in the form of hypothecation or in the form of pledge.

• Hypothecation : Under this owner borrows money against the security of moveable property.

• Right of the lender depend upon the agreement between the lender & borrower.

• Lender can sue the borrower on default dues.

PLEDGE

• Under this the owner of the goods (pledgor) deposits goods with the lender (pledgee) as security for the borrowing.

• Transfer of possession of goods is a precondition.

• Possession of goods could be actual or constructive.

• Pledgee has right to sell goods & recover dues.

MARGIN AMOUNT

• An amount that the borrower pays through his/her pocket.

• Margin is kept lowest for raw materials and highest for the accounts receivables.