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Financial Management - WORKING CAPITAL MANAGEMENT

Bank Loans - Sources Of Working Capital

   Posted On :  21.06.2018 11:47 pm

The bank loans, in general, are a short-term financing say for a year or so.

Bank Loans
 
The bank loans, in general, are a short-term financing say for a year or so. This short-term financing to business firm is regarded as self-liquidating. It means, banks routinely provide finance to meet the seasonal demand e.g., to cover the seasonal increase in inventories or receivables. Sometimes, the banks may approve separate limits for peak season and non-peak season. The main sources of short-term funds are cash credit, overdraft and bill discounting.



Types of Bank Loans

In India banks provide financial assistance for working capital in different shapes and forms. The usual forms of bank loans are as follows:

Cash credit: 


Cash credit arrangements are usually made against the security of commodities hypothecated with the bank. It is an arrangement by which a banker allows his customer to borrow money upto a certain limit. The interest is charged at the specified rate on the amount withdrawn and for the relevant period.

Overdraft: 


A firm, already having a current account with a banker is allowed to withdraw above the balance in the current account. The amount so overdrawn may be repaid by depositing back in the current account as and when the firm wants. The firm need not get permission from the banker every time it is overdrawing but one time approval is necessary. However a bank can review and modify the overdraft limit at any time. A cash credit differs from an overdraft in the sense that the former is used for long-term by commercial and industrial concerns during regular business while the latter is supposed to be a form of bank credit to be used occasionally and for shorter durations.


Bills discount and bills purchased: 


The banks also give short-term advances to their customers by discounting the bills of exchange. The discount depends upon the amount of the bill, the maturity period and the prime-lending rate prevailing at that time. The bills may be payable on demand or on maturity. Whenever bills payable on demand is discounted, it is called bills purchased, and when the bills payable at maturity is discounted by bank, it is called bills discounting.

Merits


Low cost: Bank loans provided by the commercial banks are generally cheaper as compared to any other source of short-term finance.

Flexibility: Since the banks are providing loans by deferred schemes of finance, considerable flexibility can be maintained.
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