Question

What are the essential differences among working capital loans, open credit lines, asset-based loans, term loans, revolving credit lines, interim financing, project loans, and acquisition loans? Support your answer with relevant example drawn from the industry, or research literature from academia.(Your answer for each question should be between 500 to 700 words)

Answer 1

Reference : As mentioned in the question differences among

· Working capital loans,

· Open credit lines,

· Asset based loans

· Term loans

· Revolving credit lines

· Interim financing

· Project loans

· Acquisition loans

I am explaining each content one by one.

Answer:

1. WORKING CAPITAL LOANS – A working capital loan is generally meant for small & medium term enterprises to fulfil their working capital requirements. Working capital refers to the money or funds that are required to run day to day short term trading operations of an enterprise. For example working capital loan can be used for

• Procuring raw materials
• Purchase inventory
• Pay for overhead costs like electricity, rent, salaries and other utilities
• Finance blocked payments from debtors
• Pay suppliers in advance
• Maintain a healthy level of cash

An enterprise need working capital loan to offset working expenses during low sales or revenues period which helps you manage sales fluctuations,acts as a cash cushion,prepares your business to take up a bulk order, stabilises and boosts cash flow, equips you to leverage business opportunities.

EXAMPLE: Suppose there is an automobile dealer and it takes working capital loan to pay his day to day to expenses like staff salary ,accounts payable,rent of premises etc.

2.OPEN CREDIT LINE:A credit line allows you to borrow in increments repay it and borrow as long as the line remains open . Typically you will required to pay interest on borrowed balance while the line is open for borrowing which makes it different from a traditional loan.

3. ASSET BASED LOAN –An asset based loan is a loan which is taken by a company keeping their asset as security with the lender. An asset based loan is generally taken by a company when it faces cash flow problems. With this type of loan,the borrower gets access to high loan amount at affordable interest rates. Example of assets that can be used to secure a loan include accounts receivable, inventory, marketable securities and property , plant & machinery or equipment.

4.TERM LOANS- Term loans refers to a loan given by a bank to businesses which shall be repaid in regular installments over a defined period of time. Tenure of term loan repayment can be either for short period or long period. Term loans that are of a shorter duration, usually less than one year, are called short-term loans. Loan with duration of three or more years are classified as long-term loans. The interest rate on term loan can be either fixed or floating.

EXAMPLE: Companies often use term loans to purchase fixed assets, such as equipment or a new building for its production process.

5.REVOLVING CREDIT LINE – Revolving credit line is a financial arrangement in which bank agrees to lend particular amount of money to someone and allows them to borrow more money if part of the original loan is paid back. Unlike typical loan, the account does not automatically close as soon as the account reaches a zero balance.

EXAMPLE: For understanding the concept of revolving credit line best example is credit card. Suppose Mr. A owns a credit card which is having a credit limit of Rs 30000 and he uses that card to purchase some products worth Rs 10000 and bill is generated as per his billing cycle of Rs 10000. In that bill he will be given an option to pay Rs 2000 as minimum amount this month and pay balance amount of Rs 8000 along with interest in the next month OR pay full amount of bill of Rs 10000. If he pays full amount of bill of Rs 10000 then credit limit of Rs 30000 will be

restored again and can be used again.

6. INTERIM FINANCING: Interim financing is a way of obtaining funds on short term basis for a project. It can also be called gap financing or bridge financing. People or companies elects for this kind of finance for a specific purpose.

7. PROJECT LOANS: This type of loan is generally granted to corporate borrowers for the purpose of capital expenditure including setting up of new additional manufacturing facilities , construction etc. Project loan is also available to acquire the fixed assets like land and building , plant & machinery etc.

8. ACQUISITION LOANS- Acquisition means to obtain or acquire something .Thus an acquisition loan is a loan given to a company to purchase a specific asset or acquire another business or to be used for purposes that are laid out before the loan is granted.Generally acquisition loan is used for following purposes:

Purchase a company that is already successful, startup loan ,grow your existing business by acquiring a competing company,open a new franchise location of an existing company, buy out a partner’s interest in your existing business.

EXAMPLE : For example

1.Suppose you want to purchase a CNC machine then for procuring that machine company takes loan to purchase that asset.

2.You want to buy a franchisee of AMUL ice cream parlour you took acquisition loan from bank.