Credit facilities differ depending on the nature of the facilities the borrower requires and the forms of borrowers like individual borrowers, partnership firms, limited companies, etc. Various credit facilities provided by banks as mentioned below,
Fund Based Credit Facilities
The bank gives advances, loans, or facilities that one can physically draw or utilize, known as fund-based credit Facilities. There is an actual outflow of money from the bank to the borrower in fund-based credit facilities. The forms of fund-based credit facilities available with banks are as follow:
Term Loan/ Demand Loan
A loan from banks or financial institutions with a specific Principal amount and specific set of repayment schedules with a fixed maturity date to decide when the loan must be fully paid back is known as a Term Loan. A Term Loan is an ordinary course having a floating rate. Housing loans and Education loans are one-time term loans. Short Term Loans are also used to meet monthly cash requirements like payments to suppliers. Short Term Loans are utilized like an overdraft facility.
A loan from banks or financial institutions that can be called for complete repayment without any prior warning to the borrower is known as a Demand loan, which means money has to pay on lender demand. Demand loans are preferable in new businesses to work on the specific request of the lender where it is challenging to get an idea about the return.
Working Capital
Working capital is helpful to meet day to day finance requirements of a firm. Working capital is simply money required to run a business for a day by a firm. Working capital is secured or unsecured depending on the nature of business and profitability to buy material, stock, machinery, equipment or pay wages/salary, electricity bill, telephone bill, etc. Various types of working capital are as mentioned below,
Overdraft
An overdraft helps the customer draw cheques in their account over and above the credit balance. Overdraft is usually permitted to current account customers and, in rare cases, to saving account customers. An overdraft repayment has been made on-demand. Overdrafts are two types –
- Clean/ Unsecured Overdraft: Allows purely on the party’s credit, and it is for the party to meet some binding commitments on rare occasions.
- Secured Overdraft: This allows a specific limit against security. Secured overdraft is preferable with low operating cost, easy to use, and less paperwork.
Cash Credit
In a cash credit account, the account debit balance is up to a fixed limit or drawing power based on stock holding, whichever is less. A cash credit account is reviewed every twelve months means sanctioned limit validity is for twelve months. At the time of review, the limit is enhanced/reduced-based requirements and the business unit’s actual position.
Bill Finance
Bills Finance (Demand Bill) is short-term, self-liquidating finance. Banks discuss bills drawn under Credit Letter. Bill financing is helpful because the seller of goods (borrower) gets fast money from the bank for the goods they sell, regardless of whether it’s a purchase, discount, or bank bill agreement.
Export Finance
Export Finance is provided a cash flow solution to the exporters. The exporter is required short-term, medium-term, and long-term finance depending upon the export form of products. Export Finance is needed to avoid financial or non-financial risks or political risks for the foreign buyer and natural risks like earthquakes, floods, etc. Export Finance is divided into two types –
- Pre-Shipment Finance: This is also known as Packing Credit. This working capital is provided to meet various expenses before the shipment of goods.
- Post-Shipment Finance: This working capital is given to satisfy the actual shipping requirement. This working capital sets the difference between the shipping date and the final payment receipt from an overseas purchaser.
Working Capital Demand Loan
Working capital demand loan meets working capital requirements. It is within the set sub-limit of working capital. Working Capital Demand Loan is available for up to 1 year.
Priority Sector Advances
Priority Sector Advances play a vital role provided to banks by the Reserve Bank of India in providing a defined portion of bank advances to a few classified sectors such as agriculture and allied activities, micro and small enterprises, poor housing, students education, and other low-income groups or weaker sections of citizens to support financial inclusion in India.
Credit Card
A Credit Card grants a credit account to the cardholder through which cardholders can pledge money for payment to a merchant.
Non-Fund Based Credit Facilities
The bank does not give advances, loans, or facilities in physical form. Still, it provides assurance to a third party known as a non-fund-based credit facility, i.e., the outflow of the bank’s fund is not included during the time of sanction. Different Non-Fund based finance are the following:
Bank Guarantee
A bank guarantee is a financial backstop offered by a lending bank or financial institution. In the case of a bank guarantee, a lending bank or financial institution ensures that a debtor’s liabilities will be met, i.e., the bank or financial institution will cover the debt if the debtor fails to clear the debt.
Letter of Credit (LC)
A letter of credit is one form of a negotiable instrument from a bank or financial institution that guarantees a buyer’s correct payment to a seller on time. If the seller cannot make the purchase payment, the bank or financial institution may be bound to give the total or outstanding amount of the purchase.
Derivatives
A derivative is a financial security form offered by a bank or financial institution with a dependent value derived as a benchmark from a bottom-line asset or asset category. A derivative comprises a contract between two or more parties in which price variations of the underlying assets are extracted. A derivative can be used to balance globally traded exchange rates of goods.