Financial needs of trade

FINANCIAL NEEDS OF TRADE & SERVICES::

Working Capital:

A trader’s need for working capital mainly arises in the following areas:

— for purchase of stocks & advance payment
— for holding stock in trade
— for extending credit on sales

a) Purchase of stocks :

Traders dealing in certain commodities like fertilisers, steel and
timber etc. are required to tender Bank Guarantees or open Letters of Credit in favour
of the supplier. In such cases, they could be sanctioned Inland LC ( Demand / Usance)
and Bank Guarantee facilities stipulating suitable margins. It should, however, be borne
in mind that the liabilities under such limits may devolve upon the bank and hence
should be reckoned on par with the fund based limits for assessing the credit risk. Care
should also be taken to look into the levels of stocks financed by way of BG/LC facility
while assessing further fund based limits viz., cash credit facility against such stocks to
the firm. Cash Credit (Clean) or Overdraft (Clean) facility can be considered for
wholesale traders dealing in perishable goods such as vegetables etc., and for making
advance payments subject to bank’s usual terms and conditions governing such
advances.

b) Stock holding: Most of the trading concerns dealing in Fast Moving Consumer Goods
(FMCGs) and white goods such as refrigerators, washing machines or television sets,and textile goods etc., perforce hold a high level of stocks of varying designs, colours
and sizes. This is warranted to cater to the customer preferences with reference to
quality, price and models of these goods.
The preferred mode of financing the requirement for stock holding would be by
sanctioning Cash Credit facility against hypothecation of stocks. While assessing the
need for financing the stock holding level, it is essential to look into the market credit
enjoyed by the firm as traders generally enjoy considerable amount of credit on their
purchases.

c) Receivables : The sales of the trader and that of the services provider fall into three
major categories.
i) sales on credit terms— Book Debts
ii) sales on cash against delivery— on collection basis
iii) sales against documents of title to goods
Activities falling under the services sector e.g., advertising agencies generally do not have the
necessity to hold high levels of stocks/consumables. However, to a large extent, their funds
would be blocked in the receivables. Hence, it is essential that the receivables be financed by
way of cash credit against Book Debts.

Demand Drafts purchased limit may be the usual method of lending for those who effect sales
against obtention of post-dated cheques drawn on upcountry branches.
Receivable related finance takes the form of discounting of bills of exchange, supply bill finance,
overdraft against book debts.