Raising finance from a bank

Introduction:
Short and medium term finance may come from a variety of sources. It is important to decide which is most appropriate for given solution.

Companies often have to rely on bank finance; the right type of finance should be obtained.

Working capital:
Working capital is often financed by overdraft-this is a result of lagged payments and receipts as discussed earlier and the willingness of businesses to offer credit.

Long term finance:
Long term finance is used for major investments. Capital expenditure is easier to put off than, say, wages in a crisis, but a long term failure to invest can damage the business and reduce its capacity.

Relationship
several types of contractual relationship may exist between bank and customer.

     The overhead absorption rate is then used to cost each product depending upon how many relevant hours each product takes in each production cost centre.

      Raising finance from a Bank

      Debtor / Creditor relationship

      Mortgagor/mortgagee relationship

      Fiduciary Relationship

      The banks right:

      Charges and commission

      Overdrawn balances

      The banks duty:

      Honors customer cheque

      Repayment on demand

      Receipts of customer funds

      Comply with customer’s instruction

      Provide a statement

      Confidentially

      Advice of forgery

      Care and skill

      Closure of accounts

      BANKS CRITERIA FOR LENDING

    When a business is trying to borrow from a bank, it is useful to think about what factors will influence the lending decision of the bank.

     A bank’s decision whether or not be lend will be based on several factors. These may be remembered by the mnemonic CAMPARI

     Character of the customer

     Ability to borrow and repay

     Margin of profit

     Purpose of the borrowing 

     Amount of the borrowing

     Repayment terms

     Insurance against the possibility of non- payment

     Overdrafts and revolving credit facilities:

     Overdrafts are subject to an agreed limit, and are repayable on demand. The customer has a flexible means of short term borrowing. An overdraft is best considered as support for normal working capital. A customer’s account can be expected to swing between surplus and overdraft. Banks will look cotinoiusly at overdrafts which are used to purchase non-current assets.

(Details will given later: Sorrry for the inconvenience)