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To increase liquidity in a company or to shore up net working capital (NWC), medium term loan till required period is to be facilitated to the customer.
'required period' is the period within which the company can build up its NWC necessary to support its current assets.
Net working capital is Long term sources minus Long term uses. So, on the liabilities side if Long term sources are boosted with a medium term loan, inturn we are boosting the NWC and hence liquidity in the system.
Let's look why the other answers are wrong :
1. Additional overdraft - this increases both the current assets and current liabilities, and hence the increase in NWC is NIL
3. Long term loan - Tenor of loan needs to be matched to the expected period within which the client builds up the NWC. Hence, the additional clause of 'required period' used in option2.
I would advise none of the above. I would ask the company to raise additional equity & suggest a bridge loan till it is raised.
thank you for the invitation
waiting for answers :)
Agree with Vinod Jetley Sir
Agree with experts answer
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agree with the answers ..................................................
good analysis and the comments on it by members....in my view if the requirement is short term in nature, depending on the coverage available, overdraft may be suggested as a win-win solution. If the coverages are not sufficient post OD facility, medium term loan against additional security can be given. If the requirement is for a longer tenor, and coverage are not sufficient, we need to ask for additional infusion of equity.
My views are differing from others as I think as a lender we need to provide a win-win solution to the customer. If OD- which has in-out facility - suits better to the customer need as compared to a loan which is one time take and repay, we should suggest OD
