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Different Types of Credit Facilities Provided By Banks

Different Types of Credit Facilities:There are multiple funding sources available in the market for business organizations. Credit Facility offered by Banks is one such source. The different types of Credit Facilities can be broadly classified into two parts:

1.Fund Based Credit
2.Non-Fund Based Credit.
Fund Based Credit is the one where the Bank provides the Fund directly to the Borrower without any third party involvement. It usually involves an immediate flow of funds to the borrower’s account.


Different Types of Credit Facilities are as follows

1. Loan
A loan is a type of Fund-Based Credit where the Borrower has to repay the Credit within the pre-agreed time & interest. Let’s take a look at different types of loans.

A) Demand Loans & Term Loans

Demand loan:
Demand Loans, sometimes known as working capital loans, are offered by the lender to the Borrower for the short-term.The Borrower has to repay the loan on the demand of the lender. There is no fixed tenure for the repayment.

Term Loan:

These loans come with a predefined repayment schedule and tenure. As the tenure is fixed, the Borrower will have to pay some pre-payment charges in early payments

B) Unsecured Loan & Secured Loan
Unsecured Loan
These loans are offered to the Borrower without any collateral but generally carry a high interest rate. This means, if the Borrower defaults on the repayment of loan, there is no way for the lenders to acquire any asset of the Borrower whether it is tangible or non-tangible. These loans include Personal loans and student loans as well.

Secured Loan

The lenders offer these loans against any tangible or non-tangible asset like home, piece of land, vehicle etc. If the Borrower defaults on the payment, his/her assets can be acquired by the lender. Loans such as home loans and loans against property are a few types of secured loans.

2. Cash Credit
Cash credit is provided to the business owners to carry out their regular business expenses. In Cash credit, the borrower can withdraw money within a predefined limit. The interest is charged on the daily closing balance of the account rather than the borrowing limit.

3. OverDraft

This Credit Facility is offered to Current Account holders in a particular bank, to borrow the fund more than their existing balance for a specific period. These credits are secured by the physical assets, pledge of FDs, Securities or Mortgage of some immovable property in some cases.

 4. Credit Card

Under this facility, a Credit Cardholder can spend a fixed amount of money within in a limit given by the Bank.

5. Export Finance
Export finance is the financing facility which is provided by the banks to fund exporters to meet their production and export needs. The different type of export finance are
A) Packing Credit Advances
These types of credits are offered to exporters to meet the expenses for manufacturing and packing the goods for export as per the buyer’s need. The credit is offered against hypothecation of goods stock, and any other assets of the Borrower.

B) Post Shipment Finance
These type of credits are offered to the exporters once they export their product to the buyers. These credits are offered to meet the interim cash requirement of the exporter. It is offered based on the document and invoices suggesting that the export is made.

Different Types of Credit Facilities Non-Fund Based Credit

On the Contrary, Non-Fund Based Credit is where the Fund is not transferred directly to the borrower. It is offered to a third-party as agreed upon by the borrower, on behalf of the Borrower.
The different types of non-fund based credit are
1. Letter Of Credit
A letter of credit is an assurance provided by the Bank to the seller on behalf of the buyer that the seller will receive the buyer’s payment at regular intervals. It also states that if the buyer fails to pay the seller for any reason, the Bank will be responsible for the remaining or full payment.
The Letter of Credit can be divided into the following parts:

A) Sight Credit This letter of Credit is quicker than others. Here the Borrower can take the lender’s funds by showing a bill of exchange and sight letter of Credit.

B) Revocable & Irrevocable Credit: Revocable Letter of Credits is the one that can be revoked or canceled by the issuing bank without prior notice to any party.
Irrevocable Letter of Credit cannot be revoked or canceled by the issuing Bank. So once the LOC is generated, Bank will have to honor the letter.

c) Back-to-Back Credit :Under this type of Credit, the exporter requests the Bank to offer an LC to his/her local supplier. The request is based on the export LC received by the exporter from an overseas buyer.

2. Bank Guarantee

Under this type of Credit, Bank offers assurance that under any circumstances, the Guarantee issuing Bank will fulfill any financial losses incurred by the protected party as mentioned in the Contract.
Different types of loan security, discuss advantages and disadvantage

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