Education

Fund-based and non-fund based credit limits

29 Sept 2021

Working capital finance can be divided into fund-based and non-fund-based credits. The difference between the two is whether they’re physical funds or guaranteed by assurance. We explore both funding options and why they’re a great option for any business looking for capital to help grow.

fund-based vs non-fund based working capital

What is a fund-based credit limit?

Fund-based credit limits are financial products that a bank or lender will give that allows businesses to physically draw funds out of their accounts. Fund-based working capital includes funding such as:

  • Short term loans

  • Cash credit or business overdrafts

  • Term loans for fixed assets

Businesses typically use fund-based credit limits to gain quicker access to cash to help address things like cash flow problems or even stock. 

What is a non-fund-based credit limit?

Non-fund-based finance isn’t physical fundings but more of a promise of financial support compared to actual funds. Non-based-credit limits include:

  • a bank guarantee

  • letter of credit.

A bank guarantee is a guarantee from lenders that ensures the debtor will be able to repay the debt. If they can’t settle it, the bank covers it. A letter of credit is a legal document a bank can present that outlines payment will be made back by the business.

A non-based credit limit allows businesses to use funds to help grow and develop their business without physical finance. The guarantee still lets a business buy equipment or draw down loans and expand activity without having to handle the funds.

Both types of working capital enable businesses to grow and invest in their activities to help improve the company's day-to-day running. This type of finance is becoming more popular with all kinds of businesses and whilst not all high street lenders or banks can offer businesses either fund-based and non-fund-based credit facilities, there is an increasing number of lenders that are able to.

If you’re looking to start your funding journey or want to learn more about the options available to your company, speak to one of our experienced Business Finance Specialists and get started on your finance journey today.

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