Following are the steps followed by finance manager in procurement of a loan for working capital. Arrange them in a proper sequence. A. Co-ordinating the verification of assets. B. Submission of loan proposal. C. Estimation of Working Capital Requirements. D. Creation of charge on Assets. E. Document Execution. Choose the correct answer from the options given below:
C, B, A, E, D
Understanding the Working Capital Loan Procurement Process
Procuring a working capital loan involves a structured process that a finance manager typically follows. These steps ensure that the company correctly assesses its needs, presents a viable proposal to the lender, meets the lender's requirements, and completes the necessary legal formalities.
Analyzing the Steps for Loan Procurement
Let's break down each step provided in the question:
- A. Co-ordinating the verification of assets: This is a due diligence step where the lender verifies the existence and value of assets that might be offered as security or simply assessing the company's financial health.
- B. Submission of loan proposal: This is the formal application submitted to the bank or financial institution detailing the loan requirement, purpose, repayment plan, and company information.
- C. Estimation of Working Capital Requirements: Before approaching a lender, the company must first determine how much working capital it actually needs based on its operational cycle, inventory levels, receivables, etc.
- D. Creation of charge on Assets: This is a legal step where a security interest (like hypothecation or mortgage) is formally created on the company's assets in favour of the lender as collateral for the loan.
- E. Document Execution: This involves signing the loan agreement and other legal documents that formalize the terms and conditions of the loan sanctioned by the lender.
Establishing the Correct Sequence of Working Capital Loan Steps
Let's arrange these steps in a logical flow for procuring a working capital loan:
- Estimation of Working Capital Requirements (C): The very first step is for the company to analyze its financial needs and accurately estimate the amount of working capital required. Without knowing the need, a proposal cannot be drafted.
- Submission of Loan Proposal (B): Once the requirement is estimated, a formal loan proposal is prepared and submitted to prospective lenders. This proposal outlines the estimated requirement and why the loan is needed.
- Co-ordinating the verification of assets (A): After receiving the proposal, the lender will conduct due diligence. This often includes verifying the assets of the company, especially if they are being offered as security or to assess the company's overall financial strength. This step happens after the proposal is submitted and being evaluated.
- Document Execution (E): If the lender approves the loan based on the proposal and verification, the next step is the execution of loan documents. This is where the terms and conditions are legally agreed upon and signed.
- Creation of charge on Assets (D): Following the execution of documents and usually before or concurrently with the disbursement of funds, a formal charge is created on the assets pledged as security. This legal step protects the lender's interest.
Therefore, the correct sequence of steps for working capital loan procurement is C, B, A, E, D.
| Sequence No. | Step Code | Description |
|---|---|---|
| 1 | C | Estimation of Working Capital Requirements |
| 2 | B | Submission of Loan Proposal |
| 3 | A | Co-ordinating the verification of assets |
| 4 | E | Document Execution |
| 5 | D | Creation of charge on Assets |
Conclusion on Loan Procurement Sequence
The sequence C, B, A, E, D correctly represents the typical flow of activities involved in a finance manager procuring a working capital loan, from identifying the need to securing the lender's interest.
Working Capital Loan Procurement Revision Table
| Step in Sequence | Activity | Why this step comes here |
|---|---|---|
| First | Estimate Needs (C) | Need must be identified before seeking funds. |
| Second | Submit Proposal (B) | Formal application to the lender based on needs. |
| Third | Verify Assets (A) | Lender's evaluation and due diligence post-proposal. |
| Fourth | Execute Documents (E) | Legal agreement after loan approval based on evaluation. |
| Fifth | Create Charge (D) | Legal security for the lender, typically done after agreement execution. |
Additional Information on Working Capital
Working capital is crucial for a company's day-to-day operations. It is the difference between a company's current assets (like cash, accounts receivable, and inventory) and its current liabilities (like accounts payable and short-term debt). A sufficient amount of working capital ensures that a business can meet its short-term obligations and fund its operational cycle.
Estimating working capital requirements involves forecasting current assets and liabilities over a specific period, taking into account factors like sales cycles, credit terms, and inventory turnover. Methods like the operating cycle method or the projected balance sheet method are used for this estimation.
Working capital loans are short-term loans designed specifically to bridge gaps in a company's operating cycle, helping to fund expenses like raw material purchases, wages, and other operational costs until sales revenue is realized.
Important Questions from Working Capital
Which of the following physical capitals is a working capital for a factory?
As per which one of the following approaches, a firm finances a part of its permanent working capital with short term financing?
Which of the following is not the problem of human capital formation?
Which one of the following will have a net change in the amount of working capital of a company?
_______ refers to the funds, which an organisation must possess to finance its day to day operations.
