Credit Management: MBA Banking & Finance 3rd Term

Credit Management
MBA Banking & Finance

3rd Term
Chapter 3
Commercial Financing Facilities
Principles of commercial financing facilities
There are Five principles of Lending
1. Safety
2. Liquidity
3. Dispersal
4. Remuneration
5. Suitability
Types of commercial financing
facilities
A: General financing facilities
1: Temporary Bridge Finance
Definition Financing extended to a person, company, or
other entity, using existing asstes as collateral in order
to acquire new assets. Bridge financing is usually short
term.
Definition Short-term financing which is expected to be
paid back relatively quickly, such as by a subsequent
longer-term loan. also called swing loan or bridge
financing. A method of financing, used by companies
before their IPO, to obtain necessary cash for the
maintenance of operations.
These funds are usually supplied by the investment bank
underwriting the new issue. As payment, the company
acquiring the bridge financing will give a number of
shares at a discount of the issue price to the
underwriters that equally offsets the loan. This financing
is, in essence, a forwarded payment for the future sales
of the new issue
• Bridge financing is used as temporary funds to cover the
cost of your new home if the sale of your current home
isn't complete by the time your new home's purchase is
complete.
Your loan options are:
A lump-sum personal loan with a fixed interest rate, with
lump sum repayment at maturity.
• A personal demand loan with interest-only payments.
Benefits
• No minimum or maximum loan amount – the amount
depends on the confirmed source of repayment.
 Full or partial prepayment at any time without penalty.
 Competitive rates.
Running Finance
Running Finance is a fluctuating or running account
wherein a customer arranged with his bank to permit
him to overdraw his current account (known as over
draft, O/D) up to a fix limit for a short period. When the
over draft facility is given against collateral security, it is
called secured over draft, and when it is against
personal, it is named as clean draft.
• The granting of over Draft facility to a customer is
advantageous to both parties, the customer and the
bank
• Customer
1. Customer is able to to meet the working capital
requirement of the business.
2. The customer gets the facility to over draw his account
as and when the need arises up to the approved limit.
3.Whenever the customer has surplus fund, he may pay
such fund to reduce overdraft balance or settle the
balance.
4. It is running finance, there are no restrictions on drawing
more than once provided the total amount overdrawn
does 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
Demand Finance
Demand finance is also called Line of credit is an
agreement between a customer and the bank that the
bank will entertain requests from the customer for a
loan up to a predetermined amount. The line of credit is
established when the bank gives a letter to customer
stating the dollar amount of the line, the time it is in
effect ( e.g. one year) and other conditions or provisions
such as the relationship the customer must maintain
With the bank and the customer’s financial condition. If
the borrower does not meet all the terms and condition
of the letter, the bank is not obligated to make the loan
Usually the loans are for one year or less. The loan is
payable on demand of the bank or with in ninety days.
Loan is used to finance increase in inventory and
account receivable.
Term loan
Term loan is usually a single loan for a stated period of
time, or a series of loans on specified dates. They are
used for specific purpose, such as acquiring machinery,
refinancing the debts, etc. they should not be used to
finance day-to-day operations.
Term loans may have an original maturity of five years
or more.
From banker point of view the maturity of loan should
not exceed the economic life of the asset being
financed, if used as a security.
The loan may be repaid on authorized basis or at one
time.
The value of asset must be more then the amount of
loan which represent equity of the borrower.
From banker point of view the maturity of loan should not
exceed the economic life of the asset being financed, if used
as a security.
• The loan may be repaid on authorized basis or at one time.
The value of asset must be more then the amount of loan

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

An instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay on
demand or at a fixed or determinable future time, a certain
sum of money, only to or to the order of certain person or
to the bearer of the instrument
Local Bill Purchased
The commercial banks sometimes purchase the clean
and documentary bills of exchange on commission.
These bills are demands bills and are purchased only
from the approved customers of the banks. By
purchasing the demand bills , the bank pays the amount
of the bills after deduction of the commission to the
customers.
The commission here is profit of the bank. The purchase
of bill does not mean that bank is owner of the bills, but
the demand bill is held by the bank and is cashed when
money is required.
Discounting of bills
Purchasing and discounting of bills of exchange is
another short term method of profitable investment of
banks funds.
Bills of exchange can be discounted on rebate before its
due date. The rebate or discounting is earning of the
bank.
The bill of exchange usually mature in 90 days.
Advantages of discounting bills
The main advantages of discounting bills by the banks
are:
1. Safe employment of fund. The bank by discounting

the clean or documentary bill advances the amount to
the payee.
ON maturity of the bills , the amount is collected
from the drawer. The discount is the safe earning of the
bank, because the bill of exchange is the safe
instrument. If at any time the bill is dishonored, the
payee is responsible to make full payment of the bill to
the bank.
2. Certainty of payment. On maturity of the bill, there is
certainty of payment to the bank
3. Advance is liquid.As the date of payment to the bank is
sure, the short term advance is quite liquid. Rediscounting
facilities are also available on discounted bill of exchange.
4. Free from price fluctuations. The payment made by
the bank on discounted bill is free from fluctuations. The
bank realizes the bill at par value.
5.Profitable earning. the discount rate is usually higher
then interest charge on loans and advances. Bills offers
good with no risk.
6. Facility of rediscounting. The banker has the
rediscounting facilities, if it is short of fund any time.
7. Double benefit. The bank get double benefits by
rediscounting bills. The bank may get new customer by
opening an account.
Secondly the amount advanced by rediscounting the bill is
credited in the account of the customer will remain with
the bank.
International lending
International loans exhibits many of the same

characteristics as domestic loans. Individuals
multinational businesses, domestic import export
companies, foreign business and foreign governments
constitutes the basic borrowing groups. The only
difference is some prerequisites and unique risks.
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Credit Management

MBA Banking & Finance

The value of asset must be more then the amount of loan

• Inland bills also called local bills

• Definition of bills of exchange

1. Safe employment of fund. The bank by discounting

International loans exhibits many of the same

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