## Commercial Bank Finance

### Shift in Bank Lending

Traditionally, banks gave only short-term finance. Today, they also provide:

Expansion loans
Loans for new projects/units
Long-term working capital

### Types of Long-Term Bank Finance

#### 1. Term Loans

Repaid over several years (installments)
Linked to the anticipated income of the borrower
Used to purchase fixed assets or build capacity

#### 2. Working Capital Term Loan (WCTL)

Finances the core/permanent portion of working capital
Not seasonal — required throughout the year
Treated as quasi long-term finance

> Distinction: Regular working capital loans fluctuate with business cycles. WCTL funds the permanent minimum level that is always needed.

#### 3. Bridge Finance

Short-term loan from commercial banks taken while waiting for a sanctioned institutional loan to be disbursed
Repaid once the term loan is released
Security: Movable assets / Personal guarantees / Promissory notes
Cost: Higher interest rate than normal term loans (reflects short-term, unsecured risk)

Worked example

### Example 1

A company has received a ₹5 crore term loan sanction from IDBI, but disbursement will take 3 months. Meanwhile, the company needs funds immediately. It takes bridge finance of ₹5 crore from a commercial bank, to be repaid once IDBI releases funds.

### Example 2

A manufacturing company needs ₹50 lakh permanently in its working capital cycle (minimum inventory + receivables floor). The bank provides a WCTL for this permanent portion, separate from the regular cash credit limit.

⚠️ Common exam mistakes

Thinking bridge finance is a type of long-term finance — it is explicitly short-term, taken only until the main institutional loan is released.
Confusing WCTL with Cash Credit — Cash Credit covers fluctuating working capital needs; WCTL covers the permanent/core portion.
Stating that bridge finance interest equals normal term loan rates — bridge finance carries higher interest due to its short-term and temporary nature.

Reference:

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Commercial Bank Finance – Term Loans, WCTL & Bridge Finance

Worked example

⚠️ Common exam mistakes