When it comes to financing, businesses often require diverse credit facilities to meet their working capital needs and secure operations. These facilities are typically categorized into Fund-Based Limits and Non-Fund-Based Limits. Here's a breakdown of each type to help you understand their distinctions and applications.

A fund-based limit involves direct credit from the bank to the borrower. The bank provides actual funds to the borrower, which are used to meet immediate cash flow or operational needs.

•   Direct Funding: The bank disburses money to the borrower's account.
•   Interest Payment: The borrower pays interest on the utilized amount.
•   Purpose: Used for working capital, capital expenditure, or operational requirements.

•   Provides liquidity for day-to-day operations.
•   Ensures smooth functioning of business processes.

A non-fund-based limit does not involve the disbursement of funds by the bank. Instead, the bank provides a guarantee or commitment on behalf of the borrower, which can be leveraged to secure contracts or procure goods.

•   No Direct Funding: The bank’s involvement is contingent upon the borrower’s default.
•   Fee-Based: Banks charge fees or commissions instead of interest.
•   Purpose: Used to secure trade or contractual obligations.