Question

A small entrepreneur has started a cottage industrial unit in a rural area by availing government loans at concessional rates. He has engaged ten workers from the nearby locality and gives priority to local suppliers for getting inputs for his unit. He also sells the finished products at concessional rates in the neighbored area. But sometimes he finds difficulty in meeting the payment requirement for supplies of raw material. In this case guide him with any two options of source of funds from banks and its concept.

Answer 1

Two options of source of funds from banks

1.Cash credit: the facility given to the Industrial / Business customers is known as ‘Cash Credit’ (CC) account in which the stock (raw material / work in process / finished goods) lying in the go down is pledged or hypothecated as the security by the bank. 

2. Overdraft: An overdraft facility is an open-ended facility. Normally the limit is initially sanctioned for a period of one year and rolled over after a review by the bank of the facility utilised by the borrower. Bank charges interest on the actual amount utilised by the borrower.