What is Cash & Its Importance for Business.?
Cash is life blood of the business which business generates from its activities. Cash is as important for any business as oxygen for human being. Cash may also be obtained from financing from any financial institution.
What is Financing
Finance is the management of money and all those activities which are involved in investing, borrowing, lending, budgeting, saving, and forecasting.
Types of Financing
There are two major type of financing:
i) Debt Financing: Obtained from banks / financial institutions which must be returned with interest.
ii) Equity Financing: Liquidity collected by issuance of shares of the Company.
Types of Debt Financing:
There are two types of debt financing:
Short Term Financing: The Financing which will be repaid to lender within one year / 12 months period from the date of disbursement called short term financing.
Long Term Financing: Financing which will be re[aid to lender after one year / 12 months period. There is no any upper tenor for this financing.
Security Wise Short Term Debt Financing:
There are two major types of financing in respect of Security:
Hypothecation: The security in which the assets against which the financing is being availed not be handed over to lender. The possession and right to use of the assets under financing remain with owner.
Running Finance: RF is the major type of hypo based financing in which hypo charge is provided to lender. The charge may be of 1st pari passu nature or the ranking charge on all future and current assets of the Company. This is short term financing in which we may get disbursal & can repay as we want. It is normally obtained to manage daily operational requirements of the Company. This finance is adjusted / repaid from Companies own sources.
FBP (Foreign Bill Purchase): This finance is secured against export bills / documents. It must be adjusted / repaid from export proceeds against those documents which are discounted from lenders. Primary security for this type of financing is lien over documents. But ranking hypothecation charge may also be provided for discrepant export documents. Clean export documents need to any further security. This is not the regular financing as the Company has sold the foreign debtors to the lender. Now the bank will receive the amount from debtors. The exchange gains / loss affect will goes in the drawer of the lender.
FAFB (Finance Against Foreign Bills): This is not the discounting financing. This finance is the loan to the Company against security of Foreign Bills. This finance is repaid with agreed interest. Source of repayment is same as FBP i.e proceeds against export bills. The exchange gain/ loss on debtors will be for the Company / borrower. The primary security for this finance is also only lien over documents as original export documents remain with bank till adjustment of loan. Bank may ask for ranking hypothecation charge for discrepant documents.
FCEF (Foreign Currency Export Finance): This finance will be in foreign currency to finance the export consignments of the Company. Its adjustment and security will be same as FAFB.
LC (Letter of credit): LC always will be backed by FIM/ FATR. But some time when Company has no any liquidity issue the Company can obtained only LC limit from lender. Bank will receive upfront quarterly commission on LC opened. As well as bank / lender wil receive original documents form supplier bank the LC amount will be paid by borrower to Bank and bank will release the import documents. It is a non funded facility so lien over import documents will be the sufficient security for this limit.
FATR (Finance Against Trust Receipt)
It is import finance. It cannot be utilized for operational purpose as regular financing other than for import of raw materials. It is also type of hypo financing which must be secured against 1st pari passu charge on future & present current assets of the Company.
RF Pledge: This is a unique typo of financing which is pledge but security for this charge is hypo. Example of this charge is pledge of shares or investments of the Company. If Company have any investments in blue chip shares then these investments may be provided to bank as security to obtain financing. As we lender cannot get physical possession of the shares so actual pledge cannot be created. The security for this type of financing will be Letter of pledge or Lien on Shares or Investments which should be registered in Securities & Exchange Commission.
The debt financing facilities in which the assets particularly inventories of the borrower is handed over to lender. The representative of the lender called Muqaddam captured the assets of borrower and will take all responsibilities to take care & look after of the pledged stocks.
HOW TO GET FINANCE AGAINST PLEDGE
After receiving disbursal request from client, the bank analyze the DP (drawing power) of the client. After approval from bank the client will give the inventory to bank’s approved muqaddam.
The Muqaddam will receive the inventory from client and issue stock report to bank after getting sign from authorized person of client. The bank will make disbursement to client after receiving stock report from muqaddam.
This type of financing is called Cash Finance secured against pledge of client’s stocks. In this type of financing the client may get and adjust loan at any time when he wants.
The client may get MMT disbursal for a fixed tenor, i.e 30 days, 60 days, 90 days etc. This type of transaction is called MMT. The markup rate for MTT will be less than regular Cash Finance but this limit will not be independent limit. It will be with & which the main CF limit.
We cannot import anything directly without involvements of banks / financial institutions. We need to put trust worthy third party for import of material from foreign countries.
LC OPENING PROCESS:
LC opening process starts from sales purchase agreement between supplier and buyers. Al term and conditions i.e unit price, quality, quantity, etc and other all term and conditions about import, payments etc agreed. After finalization of term and conditions the supplier provide the Pro-forma Invoice which consists all term & conditions already agreed between buyers & supplier.
The buyer provide this proforma to LC opening bank. The bank also get signed IB-8 form from client alongwith request letter for opening of LC.
IRREVOCABLE LETTER OF CREDIT:
After receiving request, IB-8, proforma and insurance alongwith PPRs, LC opening bank provide draft of LC to client. The client will check the draft and will propose changes to LC issuing bank if required. The final draft will be provided to LC advising bank. Which will discuss the draft with supplier and will propose changes to LC issuing bank. As will as LC will be finalized for opening of LC. The LC issuing bank will require EIF (Electronic Import Form) from client. The client will file EIF form on WEBOC system of the Custom Department and will provide the filed EIF form to LC issuing Bank. The bank will open the LC and after receiving confirmed draft of LC and will provide the SWIFT to LC advising bank & the Client.
After opening the LC the term and conditions will be locked and cannot be altered without consent of Supplier. The customer cannot break the agreement as the LC issuing bank is now guarantor to make payment to supplier’s bank. After issuing of LC SWIFT any agreed change which want to make will be done through amendment SWIFT.
Hence after opening the LC the LC issuing Bank will bound to make payment to supplier’s bank. Supplier will make arrangements for supplies specifications as per already agreed Supplier & Buyer agreement. As will as the Goods will be on board the supplier will submit the original shipping documents to his bank. The Supplier’s bank will dispatch original documents to LC issuing bank. After receiving the original documents, the LC issuing bank will intimate to buyer for payment to supplier. The buyer will arrange payment or will request to the bank to make payment to supplier’s bank by disbursal of loan. If LC issuing bank has FIM -funded limit then will make payment to supplier’s bank by creating PAD.
MUQADDAM:
The representative, authorized person, legally appointed officer by lender / bank to look after the inventories under pledge is called Muqaddam. The lender normally appoint Muqaddam from out sources. The salaries of the Muqaddam have to pay by the borrowers which is admissible expense for borrower.
MUQADDAM FOR IMPORTED CONSIGNMENT:
If material is imported through LC or CAD contract, the borrower informed the lender about the vessel, clearing agent etc. After consent from lender the clearing agent receives the consignment and clear accordingly. The lender appoints the Muqaddam as will as inventory reached at borrower’s premises. One thig should be kept in mind that at same location there should be no duplication of same Muqaddam for more than one lenders.
PAD (PAYMENTS AGAINST DOCUMENTS):
In case of imports the banks made payment to supplier’s bank as will as the original documents received by the local bank. Hence the bank has no any pledge to secure its payments made to foreign bank. This period is called PAD period. PAD is secured against Trust Receipts signed by borrower.
FIM (FINANCE AGAINST IMPORTED MATERIAL)
Buyers bank has already make payment to supplier’s bank by creating PAD but after receiving consignment at mill site of buyer the bank create FIM after confirmation of Muqaddam that he has received the consignment.
ADJUSTMENT OF FIM:
Payment of loan against FIM will be made to bank as per already agreed terms i.e within 90 days, 120 days, 150 days etc. Client pay to banks principal amount alongwith markup. The Bank’s muqaddam releases the material after receiving DO from bank.
SBLC (STAND BY LETTER OF CREDIT)
Stand by Letter of Credit is the non funded guarantee provided by the bank to suppliers with the condition that payment will make payment to supplier if the buyer will conduct default. It is a non funded facility. The client will pay quarterly upfront commission to bank or as per terms of facility advising letter.
