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TRANSCRIPT
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Working Capital Finance
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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
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Slide Title
Trade credit• Credit terms• Benefits • Accrued income• Deffered income
Bank borrowing• Forms of bank finance• Security required
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Trade Credit
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Trade credit
• Refers to credit that a customer gets from suppliers
• It is an informal agreement, granted on an open account basis
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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
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Benefits of trade credit
• Spontaneous source of financing• Easy availability• Flexibility• Informality• Stretching accounts payable
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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
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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
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Bank borrowing
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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
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Forms of bank finance
• Overdraft• Cash credit• Purchase or discounting of bills• Letter of credit• Working capital loan
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• 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
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• 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.
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• 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.
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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.
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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.
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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.