BANKING FINANCE

Banking can be a significant source of corporate finance for businesses. Banks can provide
short-term and long-term loans to businesses to fund their working capital requirements and
capital expenditures. They can also provide lines of credit to businesses to help them manage
their cash flows better.

Services Provided by Banks

 loans, overdraft facilities, bill discounting facilities, and letters of credit to businesses.
These services help businesses manage their finances more efficiently and improve
their cash flows.
 Help businesses in raising funds through debt financing, where the business issues
debt securities such as bonds and debentures to investors, which are then purchased
by banks and other institutional investors.

Why corporate should go for banking as a source of corporate finance?

1. Banks offer a variety of financial products and services, including loans, lines of
credit, and credit cards, which can be customized to meet the specific needs of the
corporate.
2. It typically offers lower interest rates on loans compared to other sources of finance,
such as private equity or venture capital. This can result in significant cost savings for
the corporate in the long run.
3. It provides valuable financial advice and guidance to corporations, which can help
them make informed financial decisions and improve their overall financial health.
4. Often have access to large amounts of capital, which can be crucial for companies
looking to undertake large-scale projects or investments.
5. Provide valuable networking opportunities for corporations, as they often have
extensive networks of business partners and industry contacts that can help companies
connect with potential investors or customers.
Companies should carefully consider their options and choose the best source of finance for
their specific needs and circumstances.

DIFFERENCE BETWEEN LOAN TO COMPANY & LOAN TO

INDIVIDUAL

The key difference between a loan to a company and a loan to an individual is the legal
structure and the level of risk involved.

A loan to a company is typically made to a legal entity, such as a corporation or company. In

this case, the loan is made to the company itself, rather than to any individual associated with
the company. The loan is typically secured by the assets of the company, such as inventory,
accounts receivable, or real estate. This means that if the company defaults on the loan, the
lender can seize these assets to recoup its losses.

Whereas loan to an individual is typically made to a person, rather than a legal entity. In this
case, the loan is typically secured by the borrower’s personal assets, such as their home, car,
or other property. If the borrower defaults on the loan, the lender can seize these assets to
recoup its losses.

There are several key differences between these two types of loans:

1. Legal structure: A loan to a company is made to a legal entity, while a loan to an

individual is made to a person.

2. Liability: In the case of a loan to a company, the liability for the loan is typically
limited to the assets of the company, while in the case of a loan to an individual, the
borrower is personally liable for the loan.

3. Risk: A loan to a company is typically considered less risky than a loan to an

individual, as the assets of the company can be used to secure the loan. While, a loan
to an individual is typically riskier, as assets may be available to secure the loan.

4. Interest rates: The interest rates for a loan to a company may be lower than the
interest rates for a loan to an individual, as the risk is considered to be lower.
 5. Loan terms: The terms of a loan to a company may be longer than the terms of a loan
to an individual, as companies may have longer lifecycles and greater financial
stability.

Businesses typically obtain loans to fund operations, expand their operations or purchase
assets, while individuals may obtain loans for personal needs such as buying a car, financing
a home or paying for education.

LOAN, OVERDRAFT & CASH CREDIT

Loan, overdraft, and cash credit are three common sources of corporate finance offered by
banks and financial institutions. Overdrafts and cash credit facilities are typically used for
short-term financing needs such as inventory purchases or accounts receivable management.

1. Loan
 It is a type of debt financing in which the borrower receives a lump sum of
money from the lender, which must be repaid with interest over a fixed period
of time.
 Loans can be either secured or unsecured, and are typically used for long-term
investments.
 Loans are typically secured by collateral such as property, inventory, or
accounts receivable.
2. Overdraft
 It allows a borrower to withdraw more money from a bank account than is
available up to a pre-approved limit.
 Interest is charged on the overdrawn amount.
 Borrower is required to repay the amount within a specified period.
3. Cash credit
 It is a type of revolving credit facility.
 It allows a borrower to withdraw money up to a pre-approved limit.
 Interest is charged on the amount borrowed.
 Borrower is required to repay the amount within a specified period.

Whether loans, overdrafts, and cash credits are good sources for corporate finance?
  Loans can be a good source of finance for companies looking to make long-term
investments, such as purchasing equipment or expanding their operations. However,
loans require regular repayments with interest, which can put a strain on the
company’s cash flow.
 Overdrafts can be useful for companies that have occasional cash flow issues or need
short-term financing. However, overdrafts often have high interest rates and fees,
which can make them an expensive source of finance if used over an extended period.
 Cash credit can be an attractive source of finance for companies that have regular cash
flow needs, as it allows them to withdraw money up to a predetermined limit.
However, cash credit is typically secured by collateral, which means that the company
risks losing its assets if it fails to repay the credit facility.

Loans, overdrafts, and cash credit can be good sources of finance for corporate entities,
depending on their specific needs and circumstances. It is important for companies to
carefully consider the terms and costs of these facilities before taking them out, in order to
ensure that they are making the best financial decision for their business.

FUND BASED NON FUND BASED LOANS

Fund-based loans:

 Lender provides funds to the borrower.

 Borrower is required to repay the loan with interest.

 Generally, have lower interest rates compared to non-fund based loans.

 Considered less risky for the lender.

 Typically secured by collateral such as property, inventory, or accounts receivable.

 Used for long-term investments.

Non-fund based loans:

 Lender provides a guarantee or letter of credit to the borrower.

 Borrower can use the guarantee or letter of credit to obtain credit from third-party
suppliers or lenders.
  Generally unsecured and do not require collateral.

 Used for short-term transactions such as trade finance or working capital

requirements.

LETTER OF CREDIT BANK GUARANTEE

Letter of credit (LOC) and bank guarantee (BG) are both non-fund based sources of corporate
finance, meaning that they do not involve the actual transfer of funds from the lender to the
borrower.

Letter of credit (LOC)

A letter of credit is a guarantee issued by a bank on behalf of the borrower, which assures the
seller that they will be paid for their goods or services while a BG promises to assume
responsibility for a borrowers’ debt obligations.

An LOC essentially serves as a guarantee that the borrower will fulfil their payment
obligations.

It can be a useful source of finance for companies engaged in international trade.

Bank Guarantee (BG)

A bank guarantee is a promise made by a bank to assume responsibility for a borrower’s debt
obligations in the event that the borrower is unable to fulfil them.

BGs are often used as collateral for large projects or contracts, as they provide assurance to
the counterparty that they will be paid in the event that the borrower defaults on their
obligations.

Factors to be considered for both LOC & BG’s

 Risks and costs, including fees and potential liability for the borrower.
 Companies should carefully consider the terms and costs of these instruments before
using them.

LOC BG
Used in international trade. Used in both national and international
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HIRE PURCHASE, PLEDGE, HYPOTHECATION & ITS

DEFINITION & DIFFERENCES

Hire purchase, pledge, and hypothecation are all methods of securing financing for a
business.

Hire Purchase

 Hire purchase is a type of financing where the business purchases an asset on credit
and pays it off through instalment payments over a period of time.
 Once the full amount has been paid, ownership of the asset is transferred to the
business.

Pledge

 Pledge is a form of financing where the business provides a lender with physical
possession of an asset as collateral for a loan.
 The lender can take ownership of the asset if the business defaults on the loan.

Hypothecation

 Hypothecation is similar to pledge, but the lender does not take physical possession of
the asset. Instead, the lender is given a legal claim to the asset and can take ownership
if the business defaults on the loan.

All three methods can be used to secure corporate financing, but the suitability of each
method depends on the specific situation and the type of asset being financed. For example,
hire purchase may be suitable for businesses that need to acquire new equipment, while
pledge and hypothecation may be more suitable for businesses that have existing assets that
can be used as collateral for financing.

Revision

Hire purchase is a type of credit transaction where the seller retains ownership of the asset
until the buyer has made all the payments, while pledge and hypothecation are both types of
security arrangements in which an asset is pledged as collateral for a loan. With pledge, the
lender holds the asset until the loan is repaid, while with hypothecation, the borrower retains
ownership of the asset, but the lender has a security interest in it.

DISCOUNTING & FACTORING

 Discounting and factoring are two sources of corporate finance that companies can
use to manage their cash flow and obtain funds for growth.
 Discounting involves selling accounts receivable to a financial institution at a
discount in exchange for immediate cash. This can provide a quick source of funds for
a company in need of cash flow but doesn't have the time to wait for customers to pay
their invoices.
 Factoring involves selling accounts receivable to a third-party at a discounted rate in
exchange for immediate cash. The third-party, or factor, then takes over the
responsibility of collecting payments from the customers. Factoring can help
companies reduce their exposure to bad debt and also provide a quick source of
funding.
 Both discounting and factoring can be effective tools for companies looking to
manage their cash flow and obtain financing. However, they can also come with high
fees and interest rates, which should be carefully considered before choosing these
options.

LEASE FINANCING & BILL FINANCING

Lease financing and bill financing are two common sources of corporate finance that
businesses can use to secure funding.
1) Lease Financing:
 Lease financing involves leasing an asset from a leasing company instead of buying it.
 The leasing company owns the asset and the business makes regular lease payments
for a set period of time.
 At the end of the lease term, the business may have the option to purchase the asset,
return it, or renew the lease.
 This type of financing is often used for expensive equipment and machinery, as well
as for real estate.
 Lease financing can be a good option for businesses that may not have the capital to
purchase an asset upfront or want to conserve their capital for other needs.
2) Bill Financing:
 Bill financing is a short-term financing option for businesses that need to manage
their cash flow.
 This type of financing involves the use of unpaid invoices or bills to obtain a loan
from a lender. The lender will provide a loan to the business in exchange for the right
to collect on the unpaid invoices.
 Thus, it involves the sale of a business’s accounts receivable to a financial institution,
usually a bank or a factoring company.
 The financial institution pays the business up to a certain percentage of the value of
the outstanding invoices and charges a fee for the service.
 Once the customers of the business pay their invoices, the financial institution deducts
the amount paid from the total outstanding balance and returns the remaining funds to
the business.
 Bill financing can be a good option for businesses that have a lot of outstanding
invoices and need funds quickly to cover their expenses.

FACTORING

 Factoring is a financial transaction where a company sells its accounts receivable

(invoices) to a third party at a discount in exchange for immediate cash.
 This process provides a source of working capital to businesses that might be having
cash flow issues due to slow-paying customers.
 By selling their accounts receivable, companies can quickly receive funding they need
to meet their financial obligations or fund growth opportunities.
 Factoring can be an alternative to traditional bank financing for companies that have
difficulty obtaining loans due to poor credit history or lack of collateral.
 Factoring can also be more expensive than other sources of financing, particularly if a
company has a high level of accounts receivable that they wish to factor.
 Relying heavily on factoring as a source of corporate finance can have negative
implications on a company’s creditworthiness and ability to secure traditional
financing in the future.