Working Capital is a financial metric, which represents operating liquidity available to a business organization & decisions relating to working capital & short-term finance are referred to as working capital management .
Cash Credit Working Capital Demand Loan (WCDL). Standby Line Of Credit (SLC) Letter Of Credit. Bank Guarantee. HP Finance. Term Loan .
Factoring:- Factoring is the purchase of accounts receivable by a factoring company at a discount, in order to provide a business with immediate cash to fund its growth. Factoring provides short term financial accommodation to the client .
Client (Seller) Customer (Buyer) Factor Sends Invoice Place order Delivery of Goods & Invoice Pays Pays upto 80% Fixes Customer limits
Bank Guarantee:- A bank guarantee is a written contract given by a bank on the behalf of a customer. By issuing this guarantee, a bank takes responsibility for payment of a sum of money in case, if it is not paid by the customer on whose behalf the guarantee has been issued. In return, a bank gets some commission for issuing the guarantee .
Bank offers guarantee in the form of Bid security, Performance security (< 5 yrs), Advance security & Financial security.
L/c Vs. B/g: In a B/g , three parties are involved; the bank, the person to whom the guarantee is given and the person on whose behalf the bank is giving guarantee. In case of a L/c , there four parties involved; issuing bank, advising bank, the applicant (importer) and the beneficiary (exporter) .
Hypothecation Purchase Finance:- In a HP transaction the loan amount is paid in installments over a fixed period of time. Often to secure a deal a down payment has to be paid by the borrower to the financer apart from hypothecating the equipment financed. The down payment is 10-25 % of the cost of the equipment, which can be a large amount for the company to shell out at once. The asset is legally the property of the CCL. The lender also charges an interest on the amount borrowed and the borrower bears the cost of maintenance. However one of the important advantages of HP finance is that the borrower is allowed to claim the depreciation and finance charges (interest) for tax advantages.
It serves as major mode of CAPEX financing sources alongwith other sources such as Lease and Term loan Finance.
Short term corporate loans - are the loans issued for a period of 12 months along with a moratorium period i.e. a period for which EMI is paid irrespective of interest.
Long-term corporate loans - is loans, which can range from a period exceeding 12 months .
The rate of interest charged on such loans is determined by rating rationale of the body carrying out the rating process for e.g. CARE, CRISIL etc .
The rate of interest may broadly be classified as:-
BASE RATE: The minimum rate of interest that is charged by the bank. For e.g. base rate for SBI is around 9.25%.
PRIME LENDING RATE : It is the average rate of interest charged by the bank. For e.g. L&T Infra PLR is 14.25% ± spread. Companies past performances, financial data, and ranking mainly determine the spread by external agencies etc .
Working capital finance for a capital-intensive infrastructure is carried out by fund based and non-fund based sources. However the company is also provided with choice of fungiblity i.e. percentage of NFB sources which can be converted to FB sources as allowed by the banks or NBFC’s.
The drawing power of the company is calculated based on monthly select operation data (MSOD) for stock & inventory calculations and preparation of CMA (credit monitoring assessment) statement. These cumulatively determine the MPBF .
L/C is applicable in pre-defined transactions whereby the predefined amount of credit is issued by the potential financer .
Factoring : In the same way factoring option will be best suited when organization is having option to have credit of 90 days or 180 days.
Bank Guarantee : It is applicable in bidding process or mobilization or performance guarantee issues. Under such financing sources the amount is generally high and the company has the benefit of paying only the guarantee charges.
Hypothecation financing : it is carried out to secure a deal a down payment has to be paid by the borrower to the financer apart from hypothecating the equipment financed. The down payment is 10-25 % of the cost of the equipment