Resource Mobilization — Entrepreneurship STD 11 Commerce — Question

Commercial banks generally extend short term to medium term loans to firms of all sizes and in many ways like:

1. Overdraft: A temporary arrangement in the form of a permission granted to the customers to withdraw more than the amount standing to his/ her credit.

The distinct features of this facility are as follows:

• Under overdraft, the bank permits the customer to overdraw his account upto a certain limit for an agreed period.
• To avail of this facility, a customer should have a current account with that bank.
• Interest is charged on the amount actually overdrawn.
• Overdraft may be allowed on the security of assets or customer's personal security.

2. Cash credit: This facility is like overdraft arrangement with its features being

• The bank allows the borrower to borrow upto a specified limit.
• The amount is credited to the account of the borrower.
• The customer can withdraw this amount as and when he requires.
• Interest is charged on the amount actually withdrawn.
• Cash credit is usually granted on a bond or some other security.

3. Discounting of bills: Discounting of bills, is an arrangement, wherein the bank encashes the customer's bills before they become due for payment. For this, the bank charges a nominal amount called discounting charges. In case, the bill is dishonoured on due date, the bank can recover the amount from the customer.
4. Factoring: It is a financial service which is rendered by a specialised person known as a 'factor', who deals in realising the book debts, bills receivables, managing sundry debtors and sales registers of commercial and trading firms in the capacity of an agent for a commission called commercial charges or discount. Thus, it is the sale of accounts receivables to a bank or a finance company.
5. Loans and advances: A loan is a lump sum advance made for a specified period.

Here, the entire amount is paid to the borrower in lump sum either in cash or by way of transfer to his account. In this

• The borrower may withdraw the entire amount in a lump sum or in installments as per his/her needs.
• The interest is charged on full amount of loan irrespective of how much had been actually withdraw.
• Loans are generally granted against the security of certain assets.

6. Term loan: These loans are extended by the banks to their customers for a fixed period to purchase

• Machinery.
• Trucks.
• Houses, etc.

The borrower repays these back in monthly/ torquarterly/ half yearly/ annual installments.

7. Demand loans: These loans are provided by the is banks against the security of Fixed Deposits Receipts (FDRs) government securities, life insurance policies, etc.

These loans are called demand loans because bank can demand them at any time, by giving notice to the customer.