Difference between Running Finance and Loan

Difference between Running Finance and Loan

Running finance is facility offered by bank to pay a loan on usage bases. For example if entity used the loan for 3 days during the month entity are charged interest for three days. A limit is assigned to customer and customer can withdrawal fund up to that limit.

 Under the loan arrangement the entity is required to pay interest on whole amount irrespective of fund utilization.

1. Interest Rate

Running finance facility is normally offered at high rate than loan facility.

2. Trading

Running finance facility is more suitable for trading business where the short term liquidity problem can be managed by running facility. Running facility is a useful facility to fill the gap between trade payable turnover and receivable turnover.

3. Fixed asset purchase

In case of fixed asset purchase bank loan option is more suitable because loan is offered at a lower markup rate and huge investment cannot be paid back immediately therefore it is not wise to get finance at high rate.

4. Repayment

Running finance facility is a long term arrangement and usually interest is paid on monthly bases. Loan offer you a fixed installment plan for repayment known as repayment schedule.

Example of Running Finance

Mr. A got a loan of 100,000 @ 12%. He utilized the loan for to 2 months