2. Introduction
• In India, short term funds are used to finance
working capital.
• The significant sources include
– Trade credit
– Bank borrowing
• Others are
– Factoring of receivables
– Commercial papers
3. Slide Title
Trade credit
• Credit terms
• Benefits
• Accrued income
• Deffered income
Bank borrowing
• Forms of bank finance
• Security required
4.
5. Trade credit
• Refers to credit that a customer gets from
suppliers
• It is an informal agreement, granted on an
open account basis
6. Credit terms
• Credit terms refers to conditions under
which the supplier sells on credit to the
buyer, and the buyer is required to repay the
credit
• Conditions
– Due date
– Cash discount
8. Accrued expenses
• Accrued expenses represent a liability that a
firm has to pay for the services which it has
already received
• Accrued wages & salaries represent
obligations payable by the firm to its
employees
• Accrued taxes & interests constitute taxes
paid after the firm has earned profits
9. Deferred income
• It represents funds received by the firm for
goods & services which it has agreed to
supply in future
• In other words, advance payments
10.
11. Bank finance for working capital
Banks are main institutional sources of working capital
finance
• Credit limit – amount approved by the bank for the
firm’s working capital
• Margin money – it is based on principle of
conservatism and is meant to ensure security
12. Forms of bank finance
• Overdraft
• Cash credit
• Purchase or discounting of bills
• Letter of credit
• Working capital loan
13. • Overdraft
– The borrower is allowed to withdraw funds in
excess of the balance in his current account up to
a certain limit
• Cash credit
– Similar to overdraft. Her the borrower is allowed
to withdraw funds from the bank up to a
sanctioned limit
14. • Purchase or discounting of bills
– The borrower can obtain a credit from a bank
against his bills. The bank purchases or discounts
the borrower’s bills.
• Letter of credit
– Suppliers, particularly the foreign suppliers, insist
that the buyer should ensure that his bank will
make the payment if he fails to honor his
obligations.
15. • Working capital loan
– Banks provide demand loan account or separate
non operable cash credit account if a borrower
requires temporary accommodations in excess of
sanctioned credit limit to meet unforeseen
contingencies.
16. Security required in bank finance
• Hypothecation
– Borrower is provided with working capital finance
against the security of movable property.
– Neither ownership nor possession is passed to the
creditor.
17. Security required in bank finance
• Pledge
– Borrower transfers physical possession of the
property.
– Bank has the right to lien and can retain
possession of goods.
18. Security required in bank finance
• Mortgage
– Borrower transfers a legal or equitable interest in
a specific immovable property.
• Lien
– The bank has the right to retain property
belonging to the borrower.
