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CS Professional · Strategic Management and Corporate Finance

Raising of Funds - Non Fund Based: CS Professional Guide

Non-fund based financing is credit support where a bank or financial institution gives a commitment, not cash. Examples are letters of credit, bank guarantees and deferred payment guarantees. The bank pays only if a condition fails or a document is presented. To solve questions, identify the parties, the trigger for payment, the risk covered and the fee earned.

What this chapter covers

This chapter is about funding support that does not involve an immediate cash outflow from the lender. A bank lends its name and credit standing instead of money. The main instruments are the letter of credit, the bank guarantee, the deferred payment guarantee, and related credit support. The chapter also covers factoring and forfaiting, which help a seller convert receivables into cash, and the credit rating and assessment of non-fund based limits.

The chapter sits in the Corporate Finance part of Paper 5, Strategic Management and Corporate Finance. It follows the study of fund based sources such as equity, debt and term loans. It shows how a company can trade, import, bid for contracts and manage working capital without borrowing cash. You will use the same ideas when you study working capital, trade finance and risk.

Questions are written and case-based. You may get a short scenario about an importer, an exporter, a contractor or a supplier. You then need to pick the right instrument, explain how it works, name the parties, and state the risk and cost. Clear definitions and a neat structure score well.

This chapter is worth the effort because it is conceptual, compact and easy to present in a structured answer. Corporate Finance carries 60 of the 100 marks in Paper 5, and this chapter is one of its more scoring portions because the instruments follow clear patterns. If you learn the parties, the trigger for payment and the differences between instruments, you can answer both direct theory questions and short case questions. Since you need at least 40% in each paper and 50% in the group aggregate, steady marks from a chapter like this protect your total.

Raising of Funds - Non Fund Based: topics in the order to study them

  1. 1Non-Fund Based Financing: Meaning and FeaturesStart here to understand the core idea of credit support without cash outflow, which every later instrument builds on.
  2. 2Letter of CreditIt is the most common trade instrument and teaches the pattern of applicant, issuing bank, beneficiary and documents.
  3. 3Bank GuaranteeStudy it next to compare a document-based payment promise with a default-based promise.
  4. 4Deferred Payment Guarantee and Other Credit SupportIt extends the guarantee idea to purchases paid in instalments and completes the list of bank commitments.
  5. 5Factoring and ForfaitingThese move from bank commitments to selling receivables, so learn them after the guarantee instruments and compare them with each other.
  6. 6Credit Rating and Assessment of Non-Fund Based LimitsFinish with how lenders judge risk and set limits, which ties the earlier instruments together.

How to prepare Raising of Funds - Non Fund Based

Treat this chapter as a set of instruments to compare. Your aim is to explain each one in a clear structure and to choose the right one for a given case.

  1. Read the meaning and features first, and write a two-line definition of non-fund based financing in your own words.
  2. For each instrument, note the parties, the document, the trigger for payment, the risk covered and who pays the fee.
  3. Build one comparison table on paper for LC, bank guarantee and deferred payment guarantee, and another for factoring and forfaiting.
  4. Draw a simple flow diagram for each instrument and practise redrawing it from memory. A neat flow often earns marks in a written answer.
  5. Practise short case questions. State the provision or concept, apply it to the facts, then give a clear conclusion.
  6. Learn the purpose of credit rating and the basic factors lenders weigh when fixing non-fund based limits.
  7. Revise with your comparison tables and write timed answers of the length you would give in the exam.

Common mistakes in Raising of Funds - Non Fund Based

  • Treating non-fund based facilities as free of risk for the bank

    Fix: State that the bank carries a contingent liability that becomes real if the customer defaults or the condition is met.

  • Mixing up letter of credit and bank guarantee

    Fix: Link an LC to compliant documents and a guarantee to the customer's failure to perform or pay. Keep your comparison table handy.

  • Confusing factoring with forfaiting

    Fix: Remember factoring deals with ongoing trade receivables and services, while forfaiting is typically for export receivables, medium term and without recourse.

  • Naming the parties wrongly or leaving them out

    Fix: Begin each instrument answer by listing the parties and their roles, then explain the steps.

  • Writing generic theory in case questions

    Fix: Pick the instrument that fits the scenario, apply it to the named parties, and close with a clear conclusion.

  • Skipping credit rating and limit assessment

    Fix: Give it its own revision slot and be ready to explain why rating matters and what lenders examine.

Last-day revision: Raising of Funds - Non Fund Based

  • Non-fund based financing means the bank gives a commitment, not cash, at the time of the facility.
  • The bank earns a fee or commission for lending its credit standing.
  • A letter of credit is a bank's undertaking to pay the seller if the stated documents are presented in compliance.
  • The main LC parties are the applicant, the issuing bank and the beneficiary.
  • A bank guarantee obliges the bank to pay the beneficiary if the customer fails to meet an obligation.
  • An LC works on documents; a guarantee works on default of the customer.
  • A deferred payment guarantee supports purchases where the buyer pays in instalments over time.
  • Factoring is the sale of trade receivables to a factor, who provides finance and often collects the debts.
  • Forfaiting is the purchase of export receivables, usually without recourse to the exporter.
  • Credit rating helps lenders judge the borrower's ability to meet obligations and set limits.
  • Write a flow of parties and steps for each instrument in your answers.

Raising of Funds - Non Fund Based practice questions

Raising of Funds - Non Fund Based in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Raising of Funds - Non Fund Based: frequently asked questions

What is non-fund based financing?

It is a facility where a bank or financial institution gives a commitment, such as a guarantee or letter of credit, instead of lending cash. The bank pays only if a stated condition occurs. It earns a fee for this support.

What is the difference between a letter of credit and a bank guarantee?

A letter of credit is mainly a payment mechanism in trade, and the bank pays when compliant documents are presented. A bank guarantee is a security, and the bank pays when the customer fails to meet an obligation. Learn this difference first.

Is this chapter theory or numerical?

It is mostly theory and application. Papers are descriptive and case-based, so you should be ready to explain instruments, show how they work and apply them to a given situation.

How should I answer a case question on this chapter?

Identify the need in the case, choose the suitable instrument, name the parties and explain the steps. Then state the risk, the cost and your conclusion in a short, structured answer.