Working Capital (Fund and Non Fund Base Limit)

We deal with Fund Based Limits and Non-Fund Based Limits.

Fund Base Limit is a limit in which the Company gets the money from the bank or financial institution in cash.

Fund Based Limits that we deal:-

  1. a) Cash Credit (CC) :

To meet working capital requirements of the company the bank gives the CC limit against the hypothecation of Stock and Debtors. But while deciding the limit, the bank deducts the Trade Creditors also. Further, a monthly stock and debtor’s statement need to be submitted with the bank showing the position of the stock and aging of the debtors.


  1. b) Working Capital Term Loan:

It is the capital that a business requires for operating efficiently on a daily basis.

During cyclical, seasonal or festive periods, a business might require a working capital term loan to meet the increase in demand or simply need extra capital to meet their day-to-day needs. Now that we’ve understood what a working capital term loan is, here are a few situations when a business might require such loans:

  1. Irregular cash flow, due to a longer period of stock turnover.
  2. Lack of cash reserves for meeting sudden cash crunches.
  3. Taking up new opportunities, which can’t be availed due to insufficient funds


  1. c) Factoring:

The selling of a company’s accounts receivables, at a discount to a factor that then assumes the credit risk of the account debtors and receives cash as the debtors settle their account. There is no need to open the Letter of Credit (LC)

There are specialized financial institutions such as SBI Factors, Global Trade Finance, IFCI Factors which gives services of factoring (Domestic as well as International).

Reverse factoring is also possible. In this case discounting of suppliers' bills is done by a factor in respect of the client's regular purchases from them.

  1. d) Ad hoc or Temporary Limit:

The Ad-hoc limit is the limit fixed by the bankers to its existing clients in the following cases:

  1. Sudden Bulk order results additional working capital requirement created
  2. The proposal of the working capital is either in the process of enhancement or renewal.

iii. In any other case which the bank thinks is suitable justification for sanction of ad- hoc limit.


  1. e) Cash Credit Limit against Book Debts:

Book Debts of account receivables arising out of the sale of goods or service on credit. Under this system the bank allows the borrower to draw to the extent of the limit sanctioned to him provided the drawings are backed by adequate receivables.

  1. i) The margin for advances is normally in the range 30-40% of the book debts accepted as security.

ii)The borrower should submit monthly statements showing the outstanding book debts party-wise.


  1. f) Line Of Credit:

An arrangement between a financial institution and a customer that establishes a maximum loan balance that the bank will permit the borrower to maintain.

The advantage of a line of credit over a regular loan is that interest is not usually charged on the part of the line of credit that is unused, and the borrower can draw on the line of credit at any time that it needs to.


  1. g) Packing Credit:

PC is available to exporters, for financing purchase, processing, manufacturing or packing of goods prior to shipment.

This is basically a loan or advance extended to the exporter by the bank on the basis of:

  1. Letter of Credit opened in favor of the exporter or in favor of some other person, by an overseas buyer.
  2. a confirmed and irrevocable purchase order for the export of goods from India. c. any other evidence of an order or export from India


Non-Fund Based Limits that we deal:-

Non-Fund based limit includes credit facilities given by the banks where actual bank funds are not involved are termed as 'non-fund based facilities.

  1. a) Letter Of Credit:

A standard, commercial letter of credit is a document issued mostly by a financial institution on the request of the buyer in favor of the supplier of goods which usually provides an irrevocable payment undertaking. It may be Inland LC or Foreign LC. In this case, the buyer bank gives a guarantee on behalf of its client to the supplier for supplying of material or goods subject to that invoices, bill of lading, shipment documents will come directly to the bank. Bank will mark a lien on the goods and will stand as lender/creditor in the books of the client (buyer).

The supplier could opt for discounting of LC. In this case, he will approach his bankers/agent/factor that will again approach the buyer client.

 The bank will make payment (after deducting the margin) on behalf of its client for a fee.

The margin is normally in the range of 10 to 25%, and the bank put the money in the form of FDR at prevailing rate till the settlement of the final claim.

  1. b) Bank Guarantee:

In BG the bank guarantees a sum of money to a beneficiary. The sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially ensure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.



That is paid a fixed number of days after shipment or presentation of prescribed documents. It is used where a buyer and a seller have a close working relationship because, in effect, the seller (beneficiary of the L/C) is financing the purchase by allowing the buyer a grace period for payment. It differs from a sight draft or time draft in that no drafts are involved but the payment is guaranteed on the stated date. However, there is no draft, the beneficiary party's ability to discount or sell his or her right to payment is restricted.