A Brief Idea on Funded & Non-Funded Loans

Funded Loan Facility

Funded facilities are the loan where the bank or other financial institution allocates or issues capital in the form of loans, insurance, credit cards, or real cash (not a commitment) to their client. Bank overdraft, Overnight lending facility, Project Financing, Cash Finance, Running Finance, Financing against Defence saving certificates or other marketable securities, etc. are the goods examples of the funded facility. In a Funded facility the Banks or Non-Bank financial institution or other institution that is provided finance to its client, lend to its client with real cash, not commitment.

In a Funded Facility, Fixed Charges and Floating Charges (security for the loan) will be needed. After getting sufficient security from the client, the bank will disburse the fund.

Following facility is some example of Funded Facility:

• Working Capital Loan–

The duration of a working capital loan is generally less than 1 year, but in case of the longer maturity period, the duration of the loan would also be longer.

• Overdraft Facility–

Overdraft is the revolving loan against the current Account. It is an unsecured facility where the bank doesn’t require any collateral and the borrower can overdraw funds up to an agreed limit. The interest is paid only on the amount withdrawn and for the duration.

• Cash Credit Facility (CC)–

Cash Credit Facility (CC) is a secured loan, provided by the bank against the inventory and receivable balance of the client. The interest is usually linked to a benchmark rate and decided periodically.

• Demand Loan–

Demand Loan is a popular short term revolving loan facility, usually sought by large to medium-sized companies, which is disbursed as per the requirements of the company and its interest is based on the prevailing interest rate.

• Trade Finance–

Here the bank provides loans to the seller to support his funding requirements till he gathers his funds from payments.

• Pre – Shipment Loans–

This working capital loan is handed out to purchase raw materials for the packaging of export commodities, eg. packing credit where the exporter also get concessional interest rates.

• Others–

Post shipment finance, Bill discounting, Factoring, etc. are also the goods example of the funded facility.

Non-Funded Facility

In a Non-Funded facility, the funds provided are not in real cash, but the Bank commits to the third party to pay their amount if the client fails to do so. Non-Funded Facilities are:

1. Bank Guarantee –

The bank agrees to take the required actions for any liability to the third party in the event of failure by the client. Various kinds of guarantees are-

• Deferred payment guarantees, where the bank guarantee, assures covering of deferred credit.
• A financial guarantee where the bank guarantee, promises the repayment of money (eg. advance payment received under civil construction contracts) on default by the customer is called a “financial” guarantee.
• Earnest money guarantees are those which are issued by banks, in lieu of tender of earnest money by a customer and are also known as bid bonds.
• Performance guarantees are required in case the customer bids for a tender and are successful in his bid, the other party may require a guarantee from a bank to ensure that it is according to the terms of the contract for the work undertaken.

2. Letter of Credit –

A letter of credit is undertaken by a bank on behalf of its customer with a promise to pay a certain amount of money on the condition that the supplier adheres to the loan and conditions mentioned in the letter of credit. A letter of credit is essential when the supplier of goods and services has to deals with unknown parties or feels the demand for safeguarding his interest. He can then stipulate in the sales contract with the buyer that the goods will be supplied and payment made only under a bank’s letter of credit, thereby a commitment for the payment is made by the bank which gives an assurance to the supplier that he will receive the necessary payment as per the conditions of the buyer and within the time period specified. The bank deals only via documents. These transactions are quite different from the sale and purchase contract on which it may be based.