FINANCING OF WORKING

CAPITAL

Presented by :
Manisha Maharana
Soubhagya Kumar Das
Working Capital Finance
Working Capital is a financial metric which represents operating
liquidity available to a business.
The goal of working capital management is to ensure that the firm is
able to continue its operations and that it has sufficient cash flow to
satisfy both maturing short –term debt and upcoming operational
expenses.
Sources Of Working Capital Finance

• There are two most significant short-term sources of finance for

working capital are
1. Trade credit
2. Bank borrowing
Trade Credit
• Trade Credit : It refers to the credit that a customer gets from
suppliers in normal course of trade . This deferral of payment is a
short-term financing which is called Trade credit .
• It is a major source of finance for firms . In India, it contributes to
about 1/3rd of the total short term financing .
• Particularly , small firms are heavily dependent on trade credit as a
source of finance since they find it difficult to raise funds from banks
or other sources .
• Trade credit is also called Spontaneous Source of Financing .
Credit Terms
• Credit Terms : This refers to the conditions under which the supplier
sells on credit to the buyer, and the buyer is required to repay the
credit .

• A typical way of expressing credit terms is for example : 2/15 net 45 .

This means 2% discount is available if payment is made within 15 days
and this discount is not available if payment is to be made on or
before 45 days .
Benefits and Costs of Trade Credit
• Benefits
1. Easy Availability
2. Flexibility
3. Informality
• Cost of Trade Credit
The cost of trade credit till the discount period, It means-
 If the payment is made on or before the last day of the discount
period , the buyer will benefit by the amount of discount received.
Example

• Mr X Purchases Raw Material From Mr Y for Rs 1,00,000 on credit.

The credit period is 45 days . Mr Y allow 2% cash discount to Mr X , If
he make payment with in 15 days , the he will get benefit of cash
discount . If he pay after the discount period till the due period the
benefit will be not gained.
Cost of Cash Discount

Credit period Less Amount due Full amount due

begins Rs.98,000 Rs. 1,00,000
0 5 10 15 20 25 30 35 40 45
Discount Period Additional Period

Credit Period
Accrued Expenses and Deferred Income
• Accrued Expenses
• Accrued expenses represent a liability that a firm has to pay for the
services which it has already received .
1. Accrued wages and salaries
2. Accrued taxes and interest
• Deferred Income
• Deferred income represents funds received by the firm for goods and
services which it has agreed to supply in future .
1. Advance payment
Bank Finance for Working Capital
• Overdraft
• Cash Credit
• Purchase or Discounting of Bill
• Letter of Credit
• Working Capital Loan
Overdraft
• Under this facility, the borrower is allowed to withdraw funds in
excess of the balance in his current amount , up to a certain specified
limit, during stipulated period .

Cash Credit
• Cash credit is a short term source of finance . Under cash credit, the
bank offers its customer to take a loan up to a certain limit . Cash
credit is also known as bank overdraft .
Purchase or Discounting of Bills
• Under the purchased and discounting bills, a borrower can obtain
credit from a bank against its bills. The bank purchases or discount
the borrowers bills .
• The amount provided under this agreement is covered within the
overall cash credit or overdraft limit .
Letter of credit
• Particularly the foreign suppliers, insist that the buyer should ensure
that his bank will make the payment if he fails to fulfil its obligation.
• This is ensured through a letter of credit agreement.
• The bank opens an L/C in favour of a customer to facilitate his
purchases of goods.
Working Capital Loan

• A borrower may sometimes require funds in excess of the sanctioned

credit limits to meet unforeseen contingencies .

• Banks provide such accommodation through a “demand loan

account” . The borrower is expected to pay high rates of interest in
such exceptional cases .
Security for bank Finance
• Hypothecation
• Pledge
• Mortgage
• Lien
Hypothecation
• Under this the borrower is provided working capital finance against
the security of movable property .

• The borrower does not transfer the property to the bank physically .

• Thus hypothecation is a charge against property where neither

ownership nor the possession is passed on to the creditor .

• Banks generally grant credit against hypothecation only to first class

customer with high integrity .
Pledge
• Under this arrangement the borrower, is required to physically
transfer the possession of the property offered as security to the bank
to obtain credit .

Mortgage
• Mortgage is the transfer of a legal or equitable interest in a specific
immovable property for the payment of a debt .

Lien
• Lien means right of the lender to retain property belonging to the
borrower till he repays the credit .
THANK YOU