Funded & Non-Funded Loan: Definition, Uses etc.

What is Funded Facility/Loan?

Funded Facilities are the loan where the bank or other financial institution provides real cash (not a commitment) to their client. Bank overdraft, Overnight lending facility, Cash Finance, Running Finance, Financing against Defence saving certificates or other marketable securities, Project Financing, etc are the goods examples of the funded facility. In a Funded facility the banks, Non-Bank financial institution or other institution who 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.

Some example of funded facility are clarified in below:

1) Working Capital Loan:

The duration of a working capital loan would be less than 1 year. But where the gestation period of a working capital loan is longer, the duration of loan would be longer too.

2) Overdraft Facility:

 Revolving loan against current Accounts is considered as Overdraft. This is the unsecured facility where the bank doesn’t want any collateral from the client. In this facility allows a borrower to overdraw funds beyond available up to an agreed limit. Interest is payable only on the money used for the duration of withdrawal compounded daily.

3) Cash Credit Facility (CC):

Cash Credit Facility (CC) is 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. This is a Secured loan.

4) Demand Loan:

Demand Loan is a short term revolving loan facility which is disbursed against the working capital requirements of the company. The interest rate is determined according to its current interest rate. A demand loan is a popular mode of finance which is common in a large and medium company which have large working capital requirements, unlike CC.

5) Trade Finance:

This is one kind of Working Capital Loan where the bank provides the loans to the seller to bridge his funding requirements till he gets paid.

6) Pre – Shipment Loans:

This is also a working capital loan to purchase raw materials, for packaging of export commodities. Most popular form of pre-shipment finance is packing credit where the exporter gets a concessional interste rate.

7) Others:

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

Non-Funded Facility/Loan

Non-Funded facility is the commitment given by the lenders on behalf of its customers. In a non-funded facility bank don’t provide real cash, rather providing commitment to the third party stating that if the customers fails to discharge the obligations, bank will do the same.

Following are the list of non funded facilities:

  • Letter of Credit (LC)
  • Accepted bills for the Payment (ABP)
  • Bank Guarantee (BG)

Letter of Credit (LC):

Letter of credit is considered as a very popular mode of finance in today’s business. Importer open letter of credit and bank assures to the customer (exporter) for the timely payment. If the customer fails to pay the amount on a stipulated time, the bank will pay the amount on behalf of customers. The types of LC are as follows:

Accepted Bills for the Payment (ABP):

This acceptance is given by the bank for payment after a certain period against shipping documents (bill) for import through usance (DP) LC. It is an interim arrangement by the bank where the bank allows the importer for the payment. Pre- facto approval and Post- facto approval is not needed. The tenure of the facility could be 30, 90,120, 180 or 360 days.

Bank Guarantee:

Under this, the bank agrees to discharge any liability to the third party in the event of failure by the customer to discharge their liabilities. The types of Bank Guarantee are as follows:

  • Bid Bond (BB)
  • Performance Guarantee (PG)
  • Advance Payment Guarantee (APG)
  • Warrantee Guarantee etc.