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Explain various fund based lending methods.
a.) Loan is a type of fund based lending. It is a single advance in which the entire amount of assistance is disbursed at one time only, either in cash or by transfer to the borrower’s account. The loan is generally provided at a cost i.e. interest. The loan amount is paid back in regular installments, or partial repayments, in an annuity, each installment is the same amount.
b.) Over draft is a type of fund based lending. It occurs when money is withdrawn from a bank account and the available balance becomes nil. In this situation the account is said to be overdrawn. Thus under this facility, the company is allowed to withdraw in excess of the balance standing in bank account. Bank fixes a limit beyond which the company will not be able to overdraw the account. Legally, overdraft is a demand assistance given by the bank. It is given for a very short period of time, at the end of which the company is supposed to repay the amount. Interest is payable on the actual amount drawn.
c.) Cash credit is a short term cash loan to a company. It is just like overdraft facility except there is no need to open a formal current account. Also, this type of funding requires security deposit to secure the loan given by the bank. Legally, cash credit is a demand facility. Interest is payable on actual amount drawn.
d.) Bills Purchased/ discounted facility enables the company to get the immediate payment against credit invoices raised by the company. The bank holds the invoices till the customer has actually made the payment. While granting this facility, the bank first satisfies itself about the credit worthiness of the customer and the genuineness of the bill. A limit has been fixed in case of the company beyond which the bills are not purchased or discounted by the bank.
e.) WC Term loans are a short term business loan that is commonly used to help businesses which are experiencing cash flow problems. To meet the working capital needs of the company banks may grant the working capital term loans for a period of 3 to 7 years, payable in yearly or half yearly installments.
f.) Packing credit is the type of assistance given by the bank to enable the company to buy the goods to be exported. This type of facility is included in short term facilities. Packing credit facility is in two forms:
- Pre-shipment Packing Credit
- Post-shipment Packing Credit
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