Question

Explain how an exporter which needs working capital to support its daily operation and purchases for the New Year hot season can make use of various services provided by the commercial banks.

Answer 1

There are many services related to funding of working capital which are provided by commercial banks to the exporter for the business activity are

· Overdraft facility: Commercial banks provide overdraft facility to majority of business depending on the size of the business or the size of their account. The overdraft is based on their current account which is maintained by the businesses in the respective bank. Exporter can use this facility to fund the working capital gap that is occurring during high demand period.

· Discounting of bills: Businesses does have accounts receivable on their balance sheet and since there is some time period gap between the customer pays the amount. The exporter or the business can discount the bills with the bank. The bank will charge a small amount fee and the exporter can receive the fund from the bank and the bank will collect the money from the customer for the bills.

· Short-term loans: Most businesses which are cyclical in nature are aware when the demand is going to be peak and when the demand is going to be low and banks are also aware of these situations. Banks normally provide a short-term loan during these high peak demand period in order to meet the demand of the working capital and charge certain interest on that.

· Dedicated commercial banks: There are certain financial institutions which are setup with an objective to support specific areas such as for export promotion there is export-import banks which also provide funding to the exporter to meet the working capital gap. They also provide additional services such as currency exchange, letter or guarantee or consultation regarding financing options at very low cost.