sources of working capital finance

7/31/2019 Sources of Working Capital Finance

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By;Rav ichandra.K.S .



Sources of Finance Trade Credit Accrued Expenses and Deferred Income

Bank BorrowingsFactoring of receivablesCommercial Paper



Trade Credit and Credit Terms Refers to the credit that the customer gets fromsupplier of goods in normal course of business. An informal arrangement, granted on an openaccount basis, not formally acknowledge as a debt.Trade credit may also take the form of bills payable.Credit Terms refers to the conditions of due date andcash discount.



Benefitas and Costs of Trade

CreditBenefits

1. Easy Availability.

2. Flexibility.3. Informality.

Costs1. Implicit Cost.



ACCRUED EXPENSES AND

DEFERRED INCOME Accrued Expenses

Accrued expenses represent a liability that a firm has to pay for the services which it has already received.

1. Accrued Wages and Salaries.2. Accrued taxes and Interest.Deferred Income

Deferred income represents funds received by the firm forgoods and services which it has agreed to supply in future.

1. Advance Payments.



Regulation of Bank Finance Dehejia Committee (1968)Tandon Committee (1974)Chore Committee (1979)In the deregulated economic environment in Indiarecently, banks have considerably relaxed their criteriaof lending. In fact, each bank can develop its owncriteria for the working capital finance.



Bank Finance for Working Capital OverdraftCash Credit

Purchase or Discounting of BillsLetter of Credit Working Capital Loan



Dehejia Committee –Existing

Deficiencies It is the borrower who decides how much he would borrow;the banker does not decide how much he would lend andis, therefore not in a position to do credit planning.

The bank credit is treated as first source of finance and notas supplementary to other source of finance.

The amount of credit extended is based on the amount of security available, not on the level of operations of

borrower.Security does not by itself ensure safety of bank funds sinceall bad and sticky advances are secured advances; safety essentially lies in the efficient follow-up of the industrialoperations of the borrower.



The Tandon Committee-Notions Operating PlanProduction Based Financing

Partial Bank Financing



The Chore Committee-

Recommendations 1. Reduced Dependence on Bank Credit.2. Credit limit to be separated into “peak level” and

“normal non -peak level” limits. 3. Existing Lending System to Continue.4. Information System.



COMMERCIAL PAPER Unsecured promissory notes issued by firms to raiseshort-term funds.In India, it was introduced in 1989 onrecommendation of the “ Vaghul Working Group”. Commercial papers sell at a discount from face value.



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sources of working capital finance

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