Upon assuming the role of the chief executive of CashCrunch Ltd., Mr. Barman found a peculiar problem at hand - there was no money for his own salary.

CashCrunch is a small trading company operating in the eastern part of India. It buys consumer goods and sells them through a chain of small retailers. As is typical in this trade, the retailers usually buy on credit and don’t pay on time. Mr. Barman found that the company had to maintain a large force of people who will follow up credit sales collection.

CashCrunch buys from large companies. Mr. Barman found that the suppliers can not be influenced much. CashCrunch will have to follow the credit policy of its suppliers. Any defaulting had adverse affect on its supplies.

Mr. Barman talked to some of the retailers. The retailers tend to push products of the suppliers who give large credit. Their reasoning was simple : the supplier understands their problem and hence, they are returning favour. One thing was clear - if CashCrunch stops selling on credit, the retailers would stop buying. Also, if were to follow a liberal credit policy, the sales will zoom.

Mr. Barman was wondering about the alternatives to overcome this crunching problem. He thought approaching a commercial bank would be a good idea for such problems. Most banks provide line of credit for such trading companies. Once approved, a company can take loan upto a specified limit. Of course the company will need to pay interest. Some companies charge a penalty for the unused part of the credit line.

Mr. Barman thought of preparing a cash budget for the next 12 months. He called his team of people and collected the following data.

· Closing cash balance was Rs. 15000 and 30000 in the months of August and September. Sales in these two months were 38,00,000 and 40,00,000.
· Because of the seasonal variation of the sales is high. Usually 40% of the turnover comes from the first quarter, 15% in the second, 20% in the third and rest in the fourth.
· So far 80% of the turnover comes from credit sales and the rest from cash sales.
· The company has a 20% profit margin.
· The company’s policy is to keep 50% of the projected sales as opening stock for each month.
· Usually the company buys 55% on cash, rest on credit. Of the credit purchases, 90% is paid within one month and rest within two months.
· Monthly expenses : Salary - 85,000, Rent - 20,000, Depreciation - 15,000, other expenses - 2% of sales.
The finance controller also suggested if we could follow a different credit policy to solve this problem.

Mr. Barman feels a model to evaluate different options would be a good starting point for solution to his seemingly difficult problem

Instruments for Working capital management.

Working Capital Management

There are various possibilities for managing the working capital of companies. It can be divided on the basis of
qualities and values.

To hedge purchase and sales risks, primarily in cases where the buyer and the seller do not know each other very well, we recommend using guarantees and letters of credit.

To finance stocks it is wise to use a working capital loan.

Revolving credit line is recommended to be used in case of repetitive deliveries when the need for cash fluctuates.

Overdraft is a good product for ensuring constant liquidity if incoming and outgoing payments are made at different times.

Factoring is suitable for financing accounts receivable with the aim of ensuring quick accrual of funds from buyers and allowing for the desired growth of the company. Factoring helps to save the company's resources upon administration of invoices/receivables.


Working Capital Loan

Advantages

The customer receives funds for the acquisition of seasonal stock reserves

The customer receives funds for the acquisition of stock

The customer is able to make the planned short-term investment in fixed assets

The customer is able to incur extraordinary and indispensable expenses

The customer is able to support a large-scale marketing campaign

Amount: minimum amount is 30,000

Period: maximum 1 year.

Fees:

Agreement fee

Interest: Interest is calculated as of the day when the Bank gives an order to transfer a loan amount or part of it to the current account indicated by the borrower; Interest is calculated on the outstanding loan amount on the basis of the actual number of days in a calendar month, divided by a 360-day year;

Interest calculation ends on the day the loan amount is repaid to the Bank in full.

Disbursement of loan amount: The bank disburses the loan amount either in a lump sum or in instalments;
In general, the time limit of disbursement of a loan amount is up to 3 months

The bank transfers the loan amount to the current account of the borrower in the bank or ipon request of the borrower, to the seller of the financed object/provider of the relevant services.

Loan repayment

In general, the loan is repaid by the borrower in equal instalments, which are calculated by dividing the loan amount by the number of months of the loan repayment period.

Collateral

Mortgage over immovable;

Pledge over buildings as movable;

As a supplementary collateral, commercial pledge of fixed assets and other movable property;

If necessary, other collaterals accepted by Hansabank as supplementary collaterals.

Revolving Credit Line

RCL is a loan product, where the borrower can make single transactions, i.e. take specific loan amounts in its use within the framework of the credit limit and the term specified in the Credit Line Agreement. The credit limit can be used repeatedly, i.e. when one loan amount is repaid, the borrower can take the same amount in its use again. The purpose of RCL is, therefore, to allow flexible financial management, where the borrower can repeatedly finance their activities with interest expenses corresponding to the length of the financed period.

Advantages of Revolving Credit Line

The customer receives funds for the realisation of a favourable business opportunity (purchase of goods in a larger amount, etc.)

The customer overcomes unexpected circumstances that are connected to the accrual of accounts receivable

The customer overcomes the shortness of circulating assets caused by the cyclical nature of business

Benefits of Revolving Credit Line

The application procedure of the service is much simpler than that of short-term loans

Credit Limit: Minimum credit limit is 10,00,000.

Period: maximum 5 years.

Fees

Agreement fee

Interest

Obligation fee

Two different interest rates are specified in the agreement: fixed interest and floating interest. The floating interest rate shall be based on the TALIBOR, EURIBOR or LIBOR valid on the loan amount disbursement date and corresponding to the loan amount repayment period, and the margin established in the agreement shall be added.

The borrower shall determine the interest rate to be applied to the loan amount in the application, i.e. it shall always decide between the fixed and floating interest.

Interest rate of one month shall be applied in case of a loan amount repayment period less than one month.

Interest shall be calculated from the day when the bank transfers the loan amount or part of it to the current account of the borrower.

Interest shall be payable on the final repayment date of the loan amount unless the bank and the borrower have agreed otherwise.

The bank shall inform the borrower of the interest amount payable on the final repayment date of the loan amount upon disbursement of the loan amount.

Disbursement of loan amount

In order to obtain use of the loan amount, the borrower shall every time submit a duly filled out application to the bank.

The borrower may submit the application to the bank either by post or by fax, if this has been agreed in the special conditions of the agreement.

Collateral

Mortgage over immovable;

Pledge over buildings as movable;

As a supplementary collateral, commercial pledge of fixed assets and other movable property;

If necessary, other collaterals accepted by Hansapank as supplementary collaterals.

Overdraft

Advantages

The customer can balance irregular cash flows

The customer can pay for smaller unexpected expenses

The customer can react flexibly to lesser sales growth

Flexible and simple prolongation of the service

The customer can use the funds at his/her own discretion

Period: maximum 1 year.

Amount

Minimum limit

30,000 EEK or an amount in a foreign currency which exceeds 30,000 EEK when converted to
Estonian kroons on the basis of the exchange rate of the Bank of Estonia;

maximum 50% of the net sales of the company in last 3 months;

Maximum limit

25% of the equity capital.

Upon conversion of foreign currency for the determination of the contractual limit, the exchange rate of the Bank of Estonia effective on the date of conclusion of the contract shall serve as the basis thereof.

Currency: EEK, EUR or another currency quoted by the Bank of Estonia.

Interest: the base rate of the relevant currency + the risk margin.

Interest calculation

Interest is calculated daily on the credit amount used by the customer, proceeding from a 360-day year;

The customer pays interest monthly.

Default interest

Default interest is calculated on overdue:

loan principal repayments;

interest payments;

and/or other payments payable to the bank by the borrower on the basis of a loan agreement.

The bank calculates default interest as of the day following the due date.

The calculation of default interest is stopped as of the repayment of due amounts.

The amount of default interest is 0.1% per day.

Service charges

Contract fees

Upon application and application for an additional amount - 1% a year, minimum 1,000 EEK;

Upon amendment of contractual terms - maximum 1% a year, minimum 1,000 EEK;

The refinancing fee is charged pursuant to the loan agreement concluded with the customer.

Obligation fee: - i.e. a fine calculated by the bank at the end of each day on the amount of unused limit, proceeding from a 360-day year. The obligation fee is paid monthly together with interest. The amount of the obligation fee is 2% of the unused limit per year.

Collateral

Real property mortgage;

Mortgage of movable buildings;

As supplementary collateral, commercial pledge of fixed assets and other movable properties;

If necessary, other collaterals accepted by Hansabank as supplementary collaterals.

Repayment

During the term of validity of an overdraft agreement, the customer can make credit payments remaining within the fixed credit limit from and to his/her settlement account at any time;

If the funds repaid by the customer exceed his/her liabilities to the bank set forth in an overdraft agreement, the overdraft account shall be treated as a settlement account;

By the day preceding the day of expiry of the contractual term, the customer must ensure the existence on the account of an amount that is not less than equal to the total amount of the overdraft limit, possible interest and default interest.


Factoring

Factoring is a range of services based on assignment of monetary
claims (accounts receivable) to the factor, involving:

financing;

administration and collection of accounts receivables from buyers;

minimising of risk related to doubtful invoices.

Advantages of factoring

Instead of waiting for payment by buyers for 30-120 days, we allow the client immediate financing of up to 90% of the amount of an invoice. The liquidity of the customer improves - simplifies the planning of cash flows and keeps cash flows under control.

The client gets financing without additional collateral.

The administration of accounts receivable by the factoring reduces the customers general administration costs, which would otherwise be spent on dealing with buyers, collection of money, keeping a sales ledger and the performance of credit control.

If necessary, the client receives non-recourse factoring for his/her transaction, i.e. the factoring company ensures a stable and reliable cash flow.

Factoring company assists the client with knowledge of the legal and cultural differences of foreign countries - this reduces the amount of bureaucracy and dealings with complicated documents.

Benefits of factoring

The client has an overview of the operations at any time - you will receive a report on each transaction as well as monthly consolidated reports.

Via the Internet bank Telehansa.net that has been designed for companies, the customer can view invoices based on factoring contracts and transferred for financing and administration as well as reports about transactions conducted during the month, and import them directly to his/her accounting program, if possible.

For further information call 6 133 867, 6 131 324.

Domestic factoring

The client assigns invoices to the factoring company:

For immediate financing of invoices;

For administration of invoices and insurance of the credit risk related to doubtful invoices.

Non-notification factoring

The client assigns invoices to the factoring company:

for immediate financing of invoices.

Export and import factoring (See more)

The client assigns globally issued invoices to the factoring company:

for immediate financing of invoices;

for administration of invoices and insurance of the credit risk related to doubtful invoices.

Maturity factoring

The client assigns invoices to the factoring company:

For administration of invoices and insurance of the credit risk related to doubtful invoices.

Tax factoring

ax factoring is financing of the value added tax return.

For immediate financing.

General conditions in applying

Financed period: maximum 12 months.

Financed amount: the total amount of assigned invoices to the extent of which the claims of the seller are financed.

Immediate financing: up to 90% of the amount of the claim.

Service charges :

Contract fees

Commission fees

Discounting interest

Collateral

Accounts receivable certified on the basis of original invoices and an instrument of delivery of goods/ provision of services, transportation documents or an order form and in case of tax factoring, overpaid value added tax amount certified by the Tax Board.

Upon the request and need of the customer, the right of restitution;

Other (a guarantee, surety, etc.).