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WORKING CAPITAL FINANCING
Presented By : Aastha Dutt Sharma , Aakriti , Abhijeet Singh, Pooja Srivastva , Sandeep Yadav
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27.1 ACCRUALS
• These are what the firm owes to its employees and to the government.
• Wages and taxes are major accruals.
• Accruals vary with the level activity of the firm. It increases with expansion and decreases with contraction.
• They are regarded as “free” source of financing as no interest paid by firms on it.
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27.2 TRADE CREDIT
• It represent the credit extended by the suppliers of goods & services.
• Important source of finance.
• 25 % to 50% short –term financing.
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OBTAINING TRADE CREDIT
• Confidence of suppliers.
• Suppliers looks following for granting credit
• a ) Earning record over a period of time.
• b) Liquidity position of the firm
• c) Record of payment.
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CULTIVATING GOOD SUPPLIER RELATIONSHIPS
• Honoring commitment is very important.
• Broken promise erode confidence.
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COST OF TRADE CREDIT
• It depends on the term of credit offered by the supplier.
• The cost of credit is very high beyond the discount period.
• If the firm is unable to avail of the discount for prompt payment, it should delay the payment till the last day of the net period.
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WORKING CAPITAL ADVANCE BY COMMERCIAL BANKS
• It represents source of financing current assets.
• The following are this source of finance:
• a) Application and processing
• b)Sanction and term and condition
• c) Forms of bank finance
• d) Nature of security
• e) Margin amount
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APPLICATION AND PROCESSING
• Application forms are filled for seeking advances.
• Different types of application form for different categories of advances.
• The application is processed by the branch manager.
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SANCTIONS AND TERM AND CONDITION
• Once the application is processed it is put up for sanction to the appropriate authority.
• Along with the sanction of the advances bank specifies the terms and conditions , which are as follows:-
• a) Amount of loan or maximum limit of advance
• b) Nature of the advance
• c) Period for which the advance will be valid
• d) Rate of interest applicable
• e) Primary security to charged.
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CONTINUE
f) Insurance of the security
g) Detail of collateral security , if any
h) Margin to be maintained
i) Other obligations on the part of the borrower.
• These banking practices to incorporate important term and conditions on stamped security documents to be executed by the borrower
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FORMS OF BANK FINANCE
• Commercial banks provide working capital advance in three primary ways :-
1. Cash Credit / Overdrafts
2. Loans
3. Purchase / Discount of bills
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CASH CREDIT/OVERDRAFTS
• Under this arrangement , a predetermined limit for borrowing is specified by bank.
• The borrower can draw as often as required but not exceeding the limit.
• Interest charged only on the running balance.
• This facility is for a period of one year
• Minimum charge is payable for availing the facility.
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LOANS
• These are advances of fixed amount which are credit to the current account.
• Borrower is charged with interest on the entire loan amount.
• Loans are payable either on demand or in periodical installments.
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PURCHASE/DISCOUNT OF BILLS
• Commercial Bills : A bill arise out of a trade transaction.
• Seller of goods draws the bill on the purchaser
• Bill may be either clean or documentary.
• Accommodation Bills : A bill created to raise short-termed funds and not backed by trade transaction.
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LETTER OF CREDIT
• It is an arrangement where a bank helps its customer to obtain credit from its suppliers.
• Under this credit is provided by the supplier but risk is assumed by the bank.
• It is indirect form of financing.
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SECURITY
• Bank seeks security either in the form of hypothecation or in the form of pledge.
• Hypothecation : Under this owner borrows money against the security of moveable property.
• Right of the lender depend upon the agreement between the lender & borrower.
• Lender can sue the borrower on default dues.
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PLEDGE
• Under this the owner of the goods (pledgor) deposits goods with the lender (pledgee) as security for the borrowing.
• Transfer of possession of goods is a precondition.
• Possession of goods could be actual or constructive.
• Pledgee has right to sell goods & recover dues.
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MARGIN AMOUNT
• An amount that the borrower pays through his/her pocket.
• Margin is kept lowest for raw materials and highest for the accounts receivables.
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