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Credit ManagementMBA Banking & Finance

3rd Term


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Chapter 3Commercial Financing Facilities

Principles of commercial financing facilities

There are Five principles of Lending

1. Safety

2. Liquidity

3. Dispersal

4. Remuneration

5. Suitability


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Types of commercial financingfacilities

A: General financing facilities

1: Temporary Bridge Finance

Definition Financing extended to a person, company, or

other entity, using existing asstes as collateral in orderto acquire new assets. Bridge financing is usually shortterm.

Definition Short-term financing which is expected to bepaid back relatively quickly, such as by a subsequent

longer-term loan. also called swing loan or bridgefinancing. A method of financing, used by companiesbefore their IPO, to obtain necessary cash for themaintenance of operations.


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These funds are usually supplied by the investment bankunderwriting the new issue. As payment, the company

acquiring the bridge financing will give a number ofshares at a discount of the issue price to theunderwriters that equally offsets the loan. This financingis, in essence, a forwarded payment for the future salesof the new issue

Bridge financing is used as temporary funds to cover thecost of your new home if the sale of your current homeisn't complete by the time your new home's purchase iscomplete.

Your loan options are:

A lump-sum personal loan with a fixed interest rate, withlump sum repayment at maturity.

A personal demand loan with interest-only payments.


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Benefits

No minimum or maximum loan amount the amountdepends on the confirmed source of repayment.

y Full or partial prepayment at any time without penalty.

y

Competitive rates.


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Running Finance

Running Finance is a fluctuating or running accountwherein a customer arranged with his bank to permithim to overdraw his current account (known as overdraft, O/D) up to a fix limit for a short period. When theover draft facility is given against collateral security, it is

called secured over draft, and when it is againstpersonal, it is named as clean draft.

The granting of over Draft facility to a customer isadvantageous to both parties, the customer and thebank

Customer


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1. Customer is able to to meet the working capitalrequirement of the business.

2. The customer gets the facility to over draw his accountas and when the need arises up to the approved limit.

3.Whenever the customer has surplus fund, he may paysuch fund to reduce overdraft balance or settle thebalance.

4. It is running finance, there are no restrictions on drawingmore than once provided the total amount overdrawndoes not exceed the agreed limit.

5. The interest is charged only on amount overdrawn,

6. A cheque book is issued in overdraft or running account


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Demand Finance

Demand finance is also called Line of credit is an

agreement between a customer and the bank that thebank will entertain requests from the customer for a loanup to a predetermined amount. The line of credit isestablished when the bank gives a letter to customerstating the dollar amount of the line, the time it is ineffect ( e.g. one year) and other conditions or provisionssuch as the relationship the customer must maintain

With the bank and the customers financial condition. Ifthe borrower does not meet all the terms and conditionof the letter, the bank is not obligated to make the loan

Usually the loans are for one year or less. The loan ispayable on demand of the bank or with in ninety days.

Loan is used to finance increase in inventory andaccount receivable.


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From banker point of view the maturity of loan shouldnot exceed the economic life of the asset being financed,if used as a security.

The loan may be repaid on authorized basis or at onetime.

The value of asset must be more then the amount ofloan which represent equity of the borrower.

Inland Bill Financing

There are two types of bills

Inland bills also called local bills

Foreign bills

Definition of bills of exchange


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An instrument in writing containing an unconditional order,signed by the maker, directing a certain person to pay ondemand or at a fixed or determinable future time, a certain

sum of money, only to or to the order of certain person orto the bearer of the instrument


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The commercial banks sometimes purchase the cleanand documentary bills of exchange on commission.These bills are demands bills and are purchased onlyfrom the approved customers of the banks. Bypurchasing the demand bills , the bank pays the amountof the bills after deduction of the commission to the

customers.

The commission here is profit of the bank. The purchaseof bill does not mean that bank is owner of the bills, butthe demand bill is held by the bank and is cashed whenmoney is required.

Local Bill Purchased


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Discounting of bills

Purchasing and discounting of bills of exchange isanother short term method of profitable investment ofbanks funds.

Bills of exchange can be discounted on rebate before itsdue date. The rebate or discounting is earning of thebank.

The bill of exchange usually mature in 90 days.


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The main advantages of discounting bills by the banks

are:

1. Safe employment of fund. The bank by discountingthe clean or documentary bill advances the amount to

the payee.

ON maturity of the bills , the amount is collectedfrom the drawer. The discount is the safe earning of thebank, because the bill of exchange is the safeinstrument. If at any time the bill is dishonored, the

payee is responsible to make full payment of the bill tothe bank.

2. Certainty of payment. On maturity of the bill, there iscertainty of payment to the bank

Advantages of discounting bills


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3. Advance is liquid.As the date of payment to the bank issure, the short term advance is quite liquid. Rediscountingfacilities are also available on discounted bill of exchange.

4. Free from price fluctuations. The payment made bythe bank on discounted bill is free from fluctuations. Thebank realizes the bill at par value.

5.Profitable earning. the discount rate is usually higher

then interest charge on loans and advances. Bills offersgood with no risk.

6. Facility of rediscounting. The banker has therediscounting facilities, if it is short of fund any time.

7.Double benefit. The bank get double benefits byrediscounting bills. The bank may get new customer byopening an account.

Secondly the amount advanced by rediscounting the bill iscredited in the account of the customer will remain withthe bank.


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International loans exhibits many of the samecharacteristics as domestic loans. Individualsmultinational businesses, domestic import exportcompanies, foreign business and foreign governments

constitutes the basic borrowing groups. The onlydifference is some prerequisites and unique risks.

International lending


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Banking.j

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