This article will continue to talk about Working Capital Loan. General\ncorporate banks provide overdraft\/OD, Revolving Loan and Instalment Loan to\ncater for customer\u2019s working capital need.<\/p>\n\n\n\n
Overdraft (OD): It is the most flexible offering for the company. The bank provides a fixed amount of standby funds, with the characteristics that company can withdraw and repay the fund as needed without the need to provide evidence for usage. Interest is accrued on daily basis according to the utilization. Since there is no control of the usage, the amount is generally small for short-term usage while the interest is higher than the average loan and usually at the Prime Rate or above. Commitment Fee may also be levied according to the unused portion of the OD facility.<\/p>\n\n\n\n
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Revolving Loan: A credit line is provided to the company for working capital need. Customer can provide utilization request to the bank usually with the details of drawdown amount, loan tenor and interest period, subject to the notice period (usually one to five working days). The loan tenor usually from one to six months) and the interest period (usually one, three or six months). Some loan terms may require the customer to provide the Use of Proceed, or transfer the money to a third party, depending on situations. Since the interest on the Revolving Loan is generally calculated based on the reference floating rate such as HIBOR for HKD or LIBOR for USD, the interest period must be set for the loan. For example, if the customer chooses a three-month interest period, the customer has to pay interest every three months from the date of utilization until the loan is repaid. In the normal treasury market situation, the one-month interest rate will be lower than that of the three months, but the one-month interest rate may also be subject to market fluctuation during the quarterly or large-scale listing activities. Therefore, customers need to consider carefully about the interest period. In addition, due to the smaller deposit base, some small and medium-sized banks may obtain short-term funds from other financial institutions from time to time. Since the market practice of inter-bank loan market calculates the funding with interest period of three months, if the customer chooses the interest period of one month for their loan drawdown, additional spreads may be requested by the bank to subsidize higher capital costs. Company needs to be cautious if there is such arrangement by the bank.<\/p>\n\n\n\n
In terms of repayment, company may repay the loan at the due date of the\nloan or choose to renew (Rollover). Usually banks can allow one or two\nrenewals, three to six months each time. In order to effectively control credit\nrisk, banks generally require customers to have a clean-up period of five to\nten working days in a year, and the loan amount must be repaid during the\nperiod to ensure that the client has certain liquidity. In addition, if a company\nneeds to repay early (Early Repayment), it needs to inform the bank according\nto the notice period and repay on the day of the interest period or otherwise\nthere will be a certain amount of Break Funding Cost.<\/p>\n\n\n\n
Instalment Loan: It is normally offered to many small and micro\nenterprises, mainly for ease of use. The general loan period is from one to\nfive years, and mostly within three years. There are no specific restrictions\non the use of the loan, and the monthly repayment is started from the date of loan\ndrawdown until it is completely repaid. Interest rate is fixed at the time of\nloan drawdown, therefore company needs not to worry about higher interest\nduring the life of loan due to changes in the treasury market. Interest is\nusually calculated on monthly flat-rate, and the total interest is the loan\namount x monthly flat rate x repayment period (month). The monthly repayment\namount is the principal plus the total interest divided by the number of\nrepayment periods (months). Due to product differentiation among banks, the\nterms may include interest-free period, handling fees, gift certificates or\ninterest rebates, making it difficult for customers to understand the actual\nborrowing costs. Customers are advised to compare by the Annual Percentage Rate\n(APR). APR is a reference\nannualised rate that reflects the interest and other related fees and charges\n(such as handling charges and service charges) charged on a banking product.<\/p>\n\n\n\n
In addition, even if the amount of monthly repayment is the same, in\ngeneral, the interest portion on the earlier repayment will be higher than the\nlater repayment while the principal portion goes inversely. Banks usually use the\n“Rule of 78” to calculate interest portion. Take the one-year loan as\nan example, that is, the first month of interest portion accounted for 12\/78 of\nthe whole period, the second month accounted for 11\/78, and so on, until the\ntwelfth month was 1\/78. The repayment of principal in each period is the monthly\nrepayment(fixed) minus the monthly interest portion. Although the repayment\namount is the same in each period, only a small portion of the principal is\nrepaid in the previous period. Such interest calculation is essential if there\nis early repayment by the borrower.<\/p>\n\n\n\n
Since the characteristics of working capital loans are relatively simple, the approval amount and interest rate are the key factors to consider offers among banks. FinMonster offers wide range of banking products collaborating with different financial institutions. After registering as our corporate users, we can shortlist the right bankers with the offering of various trade finance products to match your business needs.<\/p>\n","protected":false},"excerpt":{"rendered":"
This article will continue to talk about Working Capital Loan. General corporate banks provide overdraft\/OD, Revolving Loan and Instalment Loan to cater for customer\u2019s working capital need. Read more……<\/p>\n","protected":false},"author":18,"featured_media":485,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":""},"categories":[1305],"tags":[574,461],"yoast_head":"\n