Fund-based and Non-fund Based Credit Limits (2024)

What is a fund-based credit limit?

Fund-based credit limits are financial products that a bank or lender will give that allows businesses to physically draw funds out of their accounts. Fund-based working capital includes funding such as:

Businesses typically use fund-based credit limits to gain quicker access to cash to help address things like cash flow problems or even stock.

What is a non-fund-based credit limit?

Non-fund-based finance isn’t physical fundings but more of a promise of financial support compared to actual funds. Non-based-credit limits include:

  • a bank guarantee

  • letter of credit.

A bank guarantee is a guarantee from lenders that ensures the debtor will be able to repay the debt. If they can’t settle it, the bank covers it. A letter of credit is a legal document a bank can present that outlines payment will be made back by the business.

A non-based credit limit allows businesses to use funds to help grow and develop their business without physical finance. The guarantee still lets a business buy equipment or draw down loans and expand activity without having to handle the funds.

Both types of working capital enable businesses to grow and invest in their activities to help improve the company's day-to-day running. This type of finance is becoming more popular with all kinds of businesses and whilst not all high street lenders or banks can offer businesses either fund-based and non-fund-based credit facilities, there is an increasing number of lenders that are able to.

If you’re looking to start your funding journey or want to learn more about the options available to your company, speak to one of our experienced Business Finance Specialists and get started on your finance journey today.

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Fund-based and Non-fund Based Credit Limits (2024)

FAQs

What is fund based limit and non-fund-based limit? ›

Fund Based Credit Limits is CASH LOAN we received from bank as on date. Non-Fund Based is a promise in terms of Money, which is required to pay or not to pay based on Future Events. No CASH as on date.

What is the difference between fund-based and non-fund-based? ›

Working capital finance can be divided into fund-based and non-fund-based credits. The difference between the two is whether they're physical funds or guaranteed by assurance. We explore both funding options and why they're a great option for any business looking for capital to help grow.

What is the difference between funded and non funded credit? ›

Funded loans are those in which funds are transferred from the bank to the borrower, although non-funded facilities do not require such a transfer. Term loans and overdrafts are examples of secured loans. Letters of credit, bank guarantees, and other non-funded loans are examples.

What is an example of a non-fund-based credit facility? ›

Examples of non-fund-based credit include letters of credit and bank guarantees. Letters of credit: A contractual agreement in which the lender guarantees payment for goods or services provided by the borrower.

What are non fund based limits? ›

Bank Guarantee is generally the Non Fund Based Credit Limits sanctioned by the Bank. Bank shall issue Bank Guarantees on behalf of its constituents favouring 3rd parties guaranteeing to make payment of a specified sum of amount to the beneficiary on demand/claim.

What is the meaning of fund based limits? ›

A. Fund Based Limits:

Fund Base Limit is a limit in which the Company gets the money from bank or financial institution in cash. a. Cash Credit (CC) - To meet working capital requirements of the company the bank gives the CC limit against the hypothecation of Stock and Debtors.

Is cash credit fund based or non fund based? ›

The fund based finance in banks is in different forms. The facilities like Overdrafts, Cash Credit A/c, Bills Finance, Demand Loans, Term Loans, etc, wherein the immediate flow of funds available to borrowers, are called funds based facility.

What are the advantages of non fund based credit? ›

So, the banks do not deal in cash transactions or funds. The benefits of these types of loans is that there is no immediate outlay of funds, easy monitoring comparatively, less cost to the banker, low probability of default, and contingent deployment of funds.

What is non fund credit? ›

Non-funded loans are credit facilities in which the funds of a bank or an NBFC are not directly involved. There's no direct transfer of funds from the lender to the borrower's account. The lender pays the amount to a third party on behalf of the borrower.

What does non funding mean? ›

not provided with a fund or money; not financed.

What does non funded mean? ›

: not funded : floating. an unfunded debt. 2. : not provided with funds. unfunded schools.

What is non fund based income? ›

To earn interest, banks have to give loans and need to involve funds. Therefore interest income is fund-based. Now consider the commission charged by the banks on your bills for collection. Banks funds are not involved Therefore it is a non-fund-based income.

What are non fund based advances? ›

Non-funded loans are credit facilities in which the funds of a bank or an NBFC are not directly involved. There's no direct transfer of funds from the lender to the borrower's account. The lender pays the amount to a third party on behalf of the borrower.

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