Working Capital Loan Source and Forms

What is the Source Working Capital Loan SourceThe bank credit is the primary institutional source for a working capital loan? To obtain short term bank credit, working capital requirements have to be estimated by the borrowers and the banks are approved with the necessary supporting data. The banks determine the maximum credit based on the margin requirements of the security The margin represents a percentage of the value of the asset offered as security by the borrower.

Form of working capital Loan 

After getting the overall credit limit sanctioned by the banker, the borrower draws fund periodically. The following forms of working capital loan are available to him :

Loan Arrangement: under this arrangement, the entire amount of loan is credited by the bank to the borrower’s account. In case the loan is repaid in installments interest payable on actual balances outstanding.

Overdraft Arrangements: under this arrangement, certain facilities are available to the borrowers which are not available under the loan arrangements. With the overdraft arrangements, the borrower is allowed to overdraw on his current account with the bank up to a stipulated limit

Cash credit: This form of credit is operated in the same way as the overdraft arrangement The borrower can draw up to a stipulated limit based on the security margin. He has to pay 1% as commitment charges on the unutilized balance during the period. Cash credit is usually allowed against pledge or hypothecation of goods and the borrower can provide alternative securities from time to time.