12.2.1 Nature of Bank Finance

Commercial banks have a significant role to play in meeting the short-term financial needs of the corporate sector. Trade credit meets only a limited part of this need. The gap is, therefore, largely met by the commercial banks.

Broadly speaking, there are two forms of bank credit. First, is unsecured credit that is not covered by collateral securities. The other is secured credit that is backed by collateral— which may be receivables or even inventory. Again, the credit is provided either as a single loan or as a line of credit. A single loan is normally provided for a specific purpose. The firm signs a promissory note to document its indebtedness and repays the loan within the stipulated period. ...

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