Uses of funds in

commercial
banks (Part 2)

1
 Business loan

 What is a business loan?

– A business loan is any type of financing that’s used
to fund business expenses.

2
 Why do companies need business
loans?

 To pay staff wages

 To purchase inventory
 To purchase equipment
 To purchase a vehicle
 To buy an existing company
 To invest in a new project
 … (any needs for business expense)

3
 Do we need to post collaterals in a
business loan?

 It depends on the customers’ credit risk

– Large, famous, and have high credit
score
companies can borrow without collateral
– Small, less famous, and low credit score usually must post
collateral in order to borrow money from banks.

4
 Types of business loan

 Short-term business loan

– Ex: Working capital loan
 Long-term business loan
– Ex: To buy long-term assets, to invest in a project, to do
investments

5
 Working capital loan

 Is a loan that is taken to finance a company's

everyday operations.
– Not used to buy long-term assets or investments
 This type of loan is used to provide the working
capital that covers a company's short-term
operational needs.
– Ex: working capital loan can be used to cover costs
such as payroll, rent and debt payments, inventories,
…
6
 Characteristics of Working capital
loan

 Working capital loan is a short-term loan:

– Term of the loan is usually less than 1 year
– Tied to the company’s business cycle
– Can be secured or unsecured

7
 Cash Flow Cycle

8
 Cash conversion cycle

Receive
Sell payments
Pay to from
product to
suppliers customers
customers

Buy
stocks
from
suppliers Cash Conversion Cycle

9
 Example 1

 A&C is company which produces glass. Normally, A&C

needs 8 days to complete a production process. A&C needs
4 days to deliver products to its clients and allow its client
to pay the bill 25 days after shipping complete. In
addition, A&C can postpone
making payments to its suppliers for 6 days.
Question:
 What is the cash conversion cycle of A&C?
 Suppose that A&C does not have sufficient cash to complete
the next order. It decides to borrow money from the bank,
10 what is the term of the working capital loan?
 Types of working capital loan

 Term loan
 Line of credit (credit limit)
 Invoice financing

11
 Term loan

 A term loan is a loan from a bank for a specific

amount that has a specified repayment schedule.
 Term loan can be use to finance working capital
needs
 Term loan is usually applied to:
– Low credit scoring customers
– New customers
 Because bank needs time to understand new customers!

12
 Example 2

 T&D is a knife producer. It is now 10 Feb and it has just

signed a contract to provide 25.000 knives in 10 May. The
estimated cost to produce a knife is $64, T&D allows
its client to make payments 3 months after receive products.
T&D intend to borrow 75% of the working capital need to
complete this contract.
– What is the term of the working capital loan?
– Suppose that the bank accept that T&D can repay the loan
when it receives cash from its customer, the interest rate is
11%/annum, calculate the total amount T&D need to pay the
13 bank.
 Line of credit

 Line of credit can be also used to

finance working capital needs
 A line of credit is a contract between a bank and
a corporation client that establishes the
maximum loan amount customer can
borrow. the
 The borrower can access funds from the line of
credit at any time as long as they do not exceed the
maximum amount (or credit limit) set in the contract
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 Line of credit (cont.)

 Line of credit is usually applied to:

– High credit scoring customers
– Old customers
 Customers need to make (at least) monthly interest
payment to maintain the line of credit
 The principal can be repaid at maturity or at any
time when the company receives cash from sales
15
 Example 3
 T&D is a knife producer. Now it applies for a line of credit
to finance the working capital needs. The bank offers T&S a
credit limit of $1.200.000 with the interest rate of
10,8%/annum. The bank requires T&D to make monthly
interest payment for the outstanding credit balance on 26th,
principal will be paid at maturity or at any time T&D
receives cash from sales. Suppose that T&D’s credit
transactions with the banks are in table 1. Question

– What is X?
16 – Calculate T&D’s monthly interest amount in
February,
 Table1: T&D’s transactions with
the bank
Date Transactions Amount
10-Feb Pay to T&D suppliers 750.000

16-Feb Pay monthly salary to employees 250.000

27-Feb Pay eclectic, water, telephone bills 19.000

Receive payment from T&D's clients and
2-Mar repay debt to the bank 320.000
The rest of the
10-Mar Pay to T&D suppliers credit limit (X)
Receive payment from T&D's clients and
17-Mar repay debt to the bank 400.000
Receive payment from T&D's clients and
17 30-Mar repay debt to the bank 150.000
 Example 4
 Information related to T&D’s line of credit are
as follow:
– Credit limit of $1.000.000
– Interest rate of 9,36%/annum.
– The bank requires T&D to make monthly interest payment
for the outstanding credit balance on 28th,
– Principal will be paid at maturity or at any time T&D
receives cash from sales. Suppose that T&D’s credit
transactions with the banks are in table 2. Question
 What is Y?
 Calculate T&D’s monthly interest amount in
18
March,
 Table 2:

Date Transactions Amount

08-Mar Pay to T&D suppliers 520.000

16-Mar Pay monthly salary to employees 170.000

Receive payment from T&D's clients and
22-Mar repay debt to the bank 320.000

28-Mar Pay electric, water, telephone bills 13.000

The rest of the
07-April Pay to T&D suppliers credit limit (Y)
Receive payment from T&D's clients and
17-April repay debt to the bank 120.000

19 04-May Pay to T&D suppliers 220.000