A term loan is a loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating interest rate. For example, many banks have term-loan programs that can offer small businesses the cash they need to operate from month to month. Often, a small business uses the cash from a term loan to purchase fixed assets such as equipment for its production process.
A term loan is for equipment, real estate or working capital paid off between one and 25 years. The loan carries a fixed or variable interest rate, monthly or quarterly repayment schedule, and set maturity date. The loan requires collateral and a rigorous approval process to reduce the risk of repayment. A term loan is appropriate for an established small business with sound financial statements and a substantial down payment to minimize payment amounts and total loan cost.
Cash Credit / Overdraft / Dropline Overdraft
A cash credit is a short-term cash loan to a company. A bank provides this type of funding, but only after the required security is given to secure the loan. Once a security for repayment has been given, the business that receives the loan can continuously draw from the bank up to a certain specified amount. cash credit accounts to businesses to finance their "working capital" requirements (requirements to buy raw materials or "current assets", as opposed to machinery or buildings, which would be called "fixed assets"). The cash credit account is similar to current accounts as it is a running account (i.e., payable on demand) with cheque book facility. But unlike ordinary current accounts, which are supposed to be overdrawn only occasionally, the cash credit account is supposed to be overdrawn almost continuously. The extent of overdrawing is limited to the cash credit limit that the bank sanctioned. This sanction is based on an assessment of the maximum working capital requirement of the organization minus the margin. The organization finances the margin amount from its own funds.
Generally, a cash credit account is secured by a charge on the current assets (inventory) and debtors of the organization. The kind of charge created can be either pledge or hypothecation.
Overdraft facility is a credit given to an individual/ business against his or her assets as collateral with banks. As collateral, you can offer following assets to banks: house, insurance policies, bank fixed deposits, shares and bonds, etc.
Difference between Overdraft Facility and Cash Credit Facility:-
- Banks create the charge on current assets on the company namely debtors and stock in case of Cash Credit facility and client has to submit monthly Stock Statements basis which Drawing Power is derived. The client cannot use more funds than the actual Drawing Power Limit even though the Sanction Limit is more. Banks generally insist on giving Cash Credit Facility instead of Overdraft Facility for facilities more than INR 2 cr since it helps banks in knowing the short term positions of the company( Stock and Debtors) on every month.
- Banks offer Overdraft facility generally to companies who are in the service sector and manufacturing companies where the exposure limit is lesser than INR 2 cr. In case of Overdraft Facility, bank does not create a charge on the current assets of the company and company does not have to submit stock statement every month. Thus the Sanction Limit would be the same as the Usable Limit every month.
Non Fund Based limits
The Non-Fund based Credit Facilities are nature of promises made by Banks in favour of a third party to provide monetary compensation on behalf of their clients, where the lending bank does not commit any physical outflow of funds.
What is a 'Letter Of Credit'?
A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit. Banks also collect a fee for service, typically a percentage of the size of the letter of credit. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.
A bank guarantee is a guarantee from a lending institution ensuring the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank covers it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down loans, and thereby expand business activity. A bank guarantee is a lending institution’s promise to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity.
Different Types of Bank Guarantees:- A bid bond prevents companies from tendering bids and not accepting or executing the awarded contract.
- A performance bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.
- An advance payment guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract.
- A warranty bond serves as collateral ensuring ordered goods are delivered as agreed.
- A payment guarantee assures a seller the purchase price is paid on a set date.
- A credit security bond serves as collateral for repaying a loan.
- A rental guarantee serves as collateral for rental agreement payments.
- A confirmed payment order is an irrevocable obligation where the bank pays the beneficiary a set amount on a given date on the client’s behalf.
Agri Commodity Financing
- Warehouse receipt finance to farmers - Warehouse Receipt Financing is a structured method of financing, wherein funds are extended to farmers, manufacturers, grader sorter and processors based on Agri-commodities WRF will cater to farmers, aggregators, processors, graders and sorters etc. for stocking their own produce in the Warehouses for better price realisation later and to meet immediate liquidity requirements
- Cold Storages -Credit facilities for storage of commodities like Raisin, Potato, Chillies and Jaggery etc. Bank also provides term loan for construction of cold storage.
- Funding for construction of rural warehouse & Godowns- loans for developing scientific Agri-warehousing infrastructure
A short-term loan used to finance the building of a home or another real estate project. The builder or home buyer takes out a construction loan to cover the costs of the project before obtaining long-term funding. Because they are considered fairly risky, construction loans usually have higher interest rates than traditional mortgage loans. Also known as a “self-build loan.”
Construction loans are usually taken out by builders or home buyers who are custom-building their own home (see Getting A Mortgage When Building Your Own Home). Once construction on your house is completed, you can either refinance the construction loan into a permanent mortgage or get a new loan to pay off the construction loan (sometimes called the “end loan”).
At a minimum, most lenders require a 20% down payment on a construction loan, and some require as much as 25%. To gain approval for a construction loan, you’ll need to provide the lender with a comprehensive list of construction details (also known as a “blue book”) and prove you have a qualified builder involved in the project.