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Working capital finance generally refers to debt raised for a period of less than a year from Term Lending Institutions, Commercial Banks and Non Banking Finance Companies (NBFC) catering to the short-term credit needs of the business entities. Investeurs assists clients to raise working capital for day-to-day operations as well as for other exigencies. Working capital finance may be fund-based or through non-fund based or documentary credit instruments. |
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| Fund-based: |
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Cash credit: Cash credit refers to a system of financing where a borrower is provided a credit limit, which could be utilized by him for the purpose of running day-to-day business. The limits are decided based on his overall cash requirement of the business. The calculation is based on the total operating cycle and gap between payment to be received and to be made. |
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Working Capital loan: This refers to the working capital limit of a borrower extended to him in the form of a loan. The loan component covers the permanent part of the working capital need while cash credit component caters to the fluctuating part of the limit. The interest is charged on the loan component irrespective of utilization when such a term loan is availed. Since SMEs do not generally possess expertise in managing loan funds in case of low utilization of limits and also have lower control on their working capital management, carving out a loan component is not mandatory in their case. |
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| Commercial Papers: These are short term unsecured promissory notes issued by firms with a high credit rating at a discount to the face value. The maturity varies from 15 days to a year. |
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Inter-corporate Deposits: These are unsecured short term funding raised from other corporates that have surplus funds.
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Bills Financing: Bills are negotiable instruments that the buyer agrees to pay the drawer/ payee the value of the goods after a specified period of time. On effecting sale of his products on credit, an entrepreneur could draw a bill on the purchaser and on his acceptance avail credit against the bill from his banker.
Bank financing against bills is in the form of either discounting or purchase. In case of discounting, the banker credits the client’s account for the bill amount (less discount for meeting interest charges for a remaining number of days to maturity) and collects the bill as an agent of the client. In case of purchase, the banker assumes ownership of the bill and claims it in his own right.
Factoring: It is a structured working capital finance solution that includes finance against the client’s domestic or export receivables, collection of receivables on due date, credit protection and credit advisory services. It allows the client to convert the accounts receivables to cash thereby releasing the cash generation potential of the business.
Export financing: This financial instrument is offered in case of goods exported from the country in order to arbitrage on lower interest rates abroad. In order to offset the disadvantage of higher interest rates in India faced by units competing in export markets, banks extend concessional financing for exports. The export financing can be broadly classified into: |
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Pre-shipment credit
Such financing is provided for meeting costs related to purchase of goods, processing, packing and shipping. Pre-shipment credit is available both in rupees as well as in foreign currency depending upon the requirement.
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Post-shipment credit
Post-shipment credit is provided for financing the exporter subsequent to dispatch of goods until realization of sales proceeds from the foreign buyer as per the terms of the transaction or the letter of credit received from the foreign buyer’s banker.
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Other forms of Export financing include Foreign usance bills (FBE) and Foreign Demand Bills (FDB). Foreign L/Cs (FLCs) and Export Performance Guarantees are a means of non-fund based support.
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Non-fund based/ Documentary Credit instruments:
Investeurs liaisons for clients raising funds against non-fund based or documentary instruments. These are commercial documents guaranteeing payment by the bank to the beneficiary, who is usually the seller of merchandise, against the underlying transaction.
Letter of credit: Through a letter of credit issued by a bank, it commits to honor the payment terms of the underlying transaction if the seller delivers the goods as stipulated in the contract. It could be issued either for domestic transaction or for international trade, most typically for the latter because of the long gestation periods involved.
Letter of guarantee: A letter of guarantee is issued by a banker to a third party indicating that the bank would meet the financial consequences (to a specified amount) in the event of failure of its client in adhering to the terms of the contract with the third party.
Deferred payment guarantee: Typically in case of equipment financing, the manufacturer (by itself/through a financing tie-up) offers credit to the buyers of its equipment at attractive terms to generate additional demand for its products. The Deferred Payment Guarantee (DPG) is a bank facility where the bank it extends a guarantee to the equipment manufacturer on behalf of its client that the financing extended by the manufacturer (by himself or through its preferred financier would be repaid as per the terms agreed upon.
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