Category Archives: WORKING CAPITAL FINANCING

COMMERCIAL PAPERS

COMMERCIAL PAPERS Features Commercial Paper (CP) is a short term unsecured negotiable instrument, consoling of usance promissory notes with a fixed maturity. It is issued on a discount on face value basis but it can also be issued in interest bearing form A CP when issued by a company directly to the investor is called a direct paper. The companies announce current rates of CPs of various maturities, and investo

Mortgage

Mortgage It is the transfer of a legal equitable interest in specific immovable property for securing the payment of debt. The person who pans with the interest in the property is called mortgagor and the bank in whose favour the transfer takes place is the mortgagee. The instrument of transfer is called the mortgage deed. Mortgage is, thus, conveyance of interest in the mortgaged property. The mortgage Interest

Mode of Security

Mode of Security Banks provide credit on the basis of the following modes of security Hypothecation Under this mode of security, the banks provide credit to borrowers against the security of movable property, usually inventory of goods. The goods hypothecated, however, continue to be hi the possession of the owner of these goods (i.e the borrower), the rights of the lending bank (hypothecated) depend upon the te

Term Loans for Working Capital

Term Loans for Working Capital Under this arrangement, banks advance loans for 3-7 years repayable in yearly or half yearly installments. Letter of Credit While the other forms of bank credit are direct forms of financing in which banks provide funds as well as bear risk, letter of credit direct form of working capital financing and banks assume only the risk, the credit being provided by the supplier himself. T

Loans

Loans Under this arrangement, the entire amount of borrowing is credited to the current account of the borrower or released in cash. The borrower has to pay interest on the total amount. The loans are repayable on demand or in periodic installments. They can also be renewed from time to time, As a form of financing loans imply a financial discipline on the part of the borrowers. Bills Purchased Discounted This a

BANK CREDIT

BANK CREDIT Bank credit is the primary institutional source of working capital finance in India. In fact, is represents the most important source for financing of current assets. Forms of Credit Working capital finance is provided by banks in five ways: (i) cash credits overdrafts, (ii) loans (iii) purchase discount bills, (iv) letter of credit and (v) working capital term loans. Proposal form for obtaining work

Costs

Costs Trade credit does not involve any explicit interest charge. However, there is an implicit cost of trade credit. It depends on the credit terms offered by the supplier of goods. If the terms of the credit are, say, 45 days net, the payable amount to the supplier of goods is the same whether paid on the done of purchase or on the 45th day and, therefore, trade credit has no cost, that is, it is cost free. B

Advantages

Advantages Trade credit, as a source of short term working capital finance, has certain advantages. It is easily, almost automatically, available. Moreover, it is a flexible and spontaneous source of finance. The availability and magnitude of trade credit is related to the size of operations of the firm in terms of sales purchases. For instance, the requirement of credit purchases to support the existing sales i

TRADE CREDIT

TRADE CREDIT Features Trade credit refers to the credit extended by the supplier of goods and services with the normal course of transaction business sale of the firm. According to trade practices, cash is not paid intermediately for purchases but after an agreed period of time. Thus, deferral of payment (trade credit) represents a source of finance for credit purchases. There is, however, no formal specific neg

WORKING CAPITAL FINANCING

WORKING CAPITAL FINANCING INTRODUCTION After determining the level of working capital, a firm has to decide how it is to be financed. The need for financing arises mainly because the investment in working capital current assets, that is, raw materials, work stock in process. finished goods and receivables typically fluctuates during the year. The present chapter discusses the main sources of finance for workin