FINANCING CURRENT ASSETS

 Accruals (Outstanding)
 Trade Credit
 Cash credit/Overdraft
 Short term loans
 Discounting of bills
 Letter of credit
 Security-Hypothecation/Pledge
ACCRUALS
 Delayed payment
 Considered free source of funds
 TRADE CREDIT

 Credit extended by suppliers in the normal

course of transactions without extra
negotiations.
 Earnings record
 Liquidity position
 Payment record
 Supplier relationships
 Net 30 or 2/10 net 30
CASH CREDIT/OVERDRAFT

 Pre determined borrowing limit from the bank

 Repayment partially or fully as desired
 Interest charged only on the drawn amount
 A minimum charge/fee may be levied

 20,000 next month

 10,000 –interest
SHORT TERM LOANS
 SafetStock:

 Short term loans payable with interest -3-6

months
 Seller sold goods worth Rs 100,000 on credit to the buyer
 3 months
 draw on a bill on the buyer
 The seller will deposit this bill with his bank(HDFC)
 HSBC
 100,000 97,000 TO HDFC
 95,000 TO SELLER
PURCHASE/DISCOUNT OF BILLS

 The seller draws a bill on the purchaser

 He then sends it to his bank for discounting
 The seller’s bank discounts the bill and send it to the buyer’s bank
for collection.
 If the buyer’s documents are in order ,then the buyer’s bank
discounts the bill and release the funds to the seller’s bank
 The seller gets the funds
 The buyer has to pay the bill on the due date.
LETTER OF CREDIT

 A bank helps the customers to obtain credit from

its suppliers
 The bank opens the LC in favour of the customer
undertaking the obligation to honour the payment
for the customer, if the customer fails to do so.

 Std chartered –LC

SECURITY-

 Hypothecation:
 The owner borrows money movable property
(Inventories)

 Pledge:
 The owner depoits the goods with the lender-
actual/constructive.
 TANDON COMMITTEE –
MAXIMUM PERMISSIBLE BANK FINANCE

 0.75(CA-CL)
 0.75CA -CL
 0.75(CA-CCA)-CL
 FACTORING

 A factor is a financial institution which offers

services relating to management and financing of
debts from credit sales. Very few banks offer this
service in India.
FEATURES OF FACTORING

 The factor selects the account

 Assumes responsibility for debt collection.
 Pays the client at the end of the period/when money is
collected whichever is earlier.
 Can also advance money against not yet collected/not yet
due debts(70-80%) of face value of debt
 Recourse basis-credit risk borne by client
 Non recourse basis-credit risk borne by factor
 Factor charges a commission