The bank specifies a pre-determined borrowing/credit limit under the cash credit/overdraft form of finance. The borrower can borrow up to the stipulated credit limit and within the specified limit; any number of drawings are possible to the extent of his requirements. Similarly, repayments can be made whenever the borrower has sufficient funds during the period. The interest is determined on the basis of the amount actually borrowed by the borrower and not on the sanctioned limit. But, a minimum commitment charge may be payable on the unutilized balance irrespective of the level of borrowing for availing this facility.

Under this form of bank financing, the entire amount required by the borrower is credited to his or company’s current account. It may be also released by cash if required. It would attract an interest rate that is prevailing at that time and the borrower has to pay the specified interest on the entire amount transferred to him irrespective of whether he utilizes the entire amount or not. The interest rate is specified by the bank initially before granting short-term loan. Upon maturity, the borrower has to repay the entire amount along with interest. It may be also paid periodically if the mutual agreement of the loan requires so.

Before discounting the bill, the bank satisfies itself about the credit worthiness of the drawer and the genuineness of the bill. Usually discount rates are fixed at lower rates than those of cash credit. The discounting banker asks the drawer of the bill to have his bill accepted by the drawee bank before discounting it. A bill arises out of a trade sale-purchase transaction on credit. The seller of goods draws the bill on the purchaser of goods, payable on demand or after a permitted period not exceeding 90 days. On acceptance of the bill by the purchaser, the seller offers it to the bank for discount/purchase. On discounting the bill, the bank releases the funds to the seller. The bill is presented by the bank to the purchaser/acceptor of the bill on due date for payment. This form of working capital finance is feasible because credit sales are inevitable in most of the businesses.

Letter if Credit is an indirect form of working capital financing where a letter is written by a bank stating that the bank guarantees payment of a billed amount if all the specified agreements are met and banks assume only the risk, the credit being provided by the supplier himself. The purchaser of the goods on credit obtains a letter of credit from a bank. The bank undertakes the responsibility to make payment to the supplier in case the buyer fails to meet his obligations. Thus, the way the letter of credit works is that the supplier sells goods on credit, the bank gives a guarantee and bears risk only in case of default by the purchaser.

The banks provide term-loans for short-duration years, usually three to seven years, repayable annually or semi-annually, or as per terms, under this type of financing arrangement.