Credit constitutes a major part of the money deployed in a Business Project The new entrepreneur as well as the seasoned one are dependent on the financial Institutions and Banks for the Capital for Long term assets as well as for current need like Working Capital. Effective management of the available lines of credit is the best method to ensure that new lines can be accessed, if need arises. The trick lies in ordering the servicing of the lines of Credit.
An efficient Entrepreneur keeps a close tab on the schedules of repayment for Long term loans and makes the payment without default. For this purpose, he earmarks a part of the Revenues generated by the business, after servicing the current liabilities. Business prudence requires that revenues generated should be ploughed back into the development of the business. But this advice is often wrongly implemented by buying long term assets from current revenue. This can lead to situations where Working Capital needs may suddenly arise and the business may find itself in a tight corner. Such fiascos should be scrupulously avoided. Any surplus revenue should be held in reserve, until the end of current year, after which prudent investments will be safe.
Bank Guarantees on behalf of the Business, though not exactly a Credit transaction, has a bearing on the overall availability of Credit from a given Bank. Letters of Credit opened on the request of the Business also fall in this category.
Ascertaining the order of priority in which liabilities including repayment of Credits accrue, and ensuring their payments in that order, is the best way to manage multiple lines of credit. A well managed Credit structure ensures better credit rating and possible future growth of the business.
The standard lines of credit open to a normal business venture are:
- Institutional Finance for Long term capital needs like Machinery, Buildings, other installed assets, etc.
- Short term Credit for seasonal needs of capacity addition on temporary basis or to free capital blocked in Work in Progress, unsold stocks etc.
- Short term credits against Export earnings, till the revenue is realized.
- Short Term credit for servicing Imports of specialized Raw Materials, or equipment
- Working Capital needs through Banks. Mostly these are Clean Demand Loans, extended on the general security of Goods in Process or in Bonded Warehouse, or movable fixed assets, such as Motor Vehicles, Shares and Debentures of Joint Stock Companies etc.
评论