2. Lender
It is an individual, or a public or private group who
makes funds available to another with the
expectation that the funds will be repaid, plus any
interest and/or fees.
To provide money temporarily on condition that the
amount borrowed be returned, usually with an interest
fee.
Lending
3. Principles Of Lending
The business of lending is not without certain inherent risks
largely depending on the borrowed funds. A banker cannot afford
to take undue risk in lending .
The principles are as below :
1) SAFETY : "Safety first" is when a banker lends, he must feel
certain that the advance is safe; that is, the money will
definitely come back.
2) LIQUIDITY: Bankers advance loans on the security of such
assets which are easily marketable and convertible into cash at
a short notice.
4. 3)PROFITABILITY :A bank must earn sufficient profits. It
should, therefore, invest in such securities which will
give a sure, fair and stable return on the funds invested.
4)PRODUCTIVE PURPOSES : The banker must closely
inspect the purpose for which the money is required,
which should be productive so that the money not only
remains safe but also provides a definite source of
repayment.
5. 5)DIVERSIFICATION OF RISKS : Spreading the risks
involved in lending, over a large number of borrowers,
over a large number of industries and areas, and over
different types of securities.
6)SECURITY : Security is considered as an insurance or a
cushion to fall back upon in case of an emergency . It is
only to provide against such contingencies that he takes
security so that he may realize it and reimburse himself
if the well calculated and almost certain source of
repayment unexpectedly fails.
6. Concept of Working Capital:
Working capital is the money used to pay for the every
day trading activities carried out by the business :
Purchasing of new materials , stores and spares
Payment of wages to employees.
Payment of other expenses towards energy , fuel , water
consumption , rates and taxes etc.
Other expenses requires to be incurred in connection
with production , selling and administration etc.
7. a) Gross working capital : It is firm’s investment in total current or
circulating assets . Gross working capital refers to
the firm's investment in current assets.
Gross Working Capital = Total current assets
b) Net working capital : It refers to the difference between the
current assets and current liabilities.
> Net working capital gives a general indication of the short-term
financial condition of a business.
>Net working capital can also be used to estimate the ability of a
company to grow quickly.
Net Working Capital = Current Assets – Current Liabilities
There are 2 concepts of working capital:
8. ADEQUACY OF WORKING CAPITAL
A firm should have adequate working capital i.e. as much as needed
by the firm . It should neither be excessive nor inadequate . Both
situations are dangerous .
>Excessive working capital means the firm has idle funds, which
earn no profits for the firm.
>Inadequate working capital means the firm does have sufficient
funds for running its operations which ultimately result in
production Interruption.
9. The working capital cycle is made up of four core components:
•Cash (funds available)
•Creditors (accounts payable)
•Inventory (stock in hand)
•Debtors (accounts receivable)
>The working capital cycle (WCC) is the amount of time it takes to turn the net
current assets and current liabilities into cash.
>The longer the cycle is, the longer a business is tying up capital in its working
capital without earning a return on it.
> short working capital cycle suggests a business has good CASH FLOW.
> Therefore, companies strive to reduce its working capital cycle by collecting
receivables quicker or sometimes stretching accounts payable.
WORKING CAPITAL CYCLE
10. A type of commercial loan that has to be repaid in regular
payments over a set period of time is referred to as term
loan .
>term loan is a good way to quickly increase capital in
order to raise business, supply capabilities or range.
>Individuals can have a term loan but they are usually
used for small business loans. It is an attractive loan for
new or expanding enterprises, as they have lower issuance
costs.
TERM LOAN
11. Types of term loan :
Typically lines of credit , working capital loans or
account receivable loans usually reach maturity within
one year or less .
Short term loan is an option for an established
business that has a strong support and patronage.
In a normal economy, interest rates on short-term
loans are higher than interest rates on long-term
loans.
Short term loans :
12. Long term loan
Usually mature in three to ten years , but can be longer
for real estate or equipment.
These loans are used for major business expenses such
as vehicles , purchasing facilities , construction and
furnishing .
Can also be used to carry a business through depressed
cycle
13. TERM
LOANS
WORKING
CAPITAL
loan from a bank for a
specific amount that has a
specified repayment schedule
and a floating interest rate.
Working capital is money
available to a company for
day-to-day operations.
Used to purchase fixed assets
(like machinery , land) such
as equipment used in its
production process.
It is used to clear up accounts
payable, wages, etc.
Source of finance for
Working Capital.
Source of finance for assets for
production and sale of
finished goods.
Definition
Usage
Source
