Skip to content

CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

In a non-fund based facility, a bank issues a guarantee on behalf of its customer in favour of a third party. What is the bank's position at the time the guarantee is issued?

At issue, the bank takes on only a contingent liability. No funds move. Payment arises only if the beneficiary invokes the guarantee after the applicant defaults, which is why a bank guarantee is called a non-fund based facility.

  1. AIt immediately pays cash to the beneficiary
  2. BIt gives a contingent liability and funds flow out only if the guarantee is invoked and the customer defaultsCorrect
  3. CIt becomes the owner of the customer's goods
  4. DIt lends the guarantee amount to the customer as a term loan

Explanation

A bank guarantee is a non-fund based facility. No money moves when it is issued; the bank takes on a contingent liability that turns into an actual payment only if the beneficiary invokes it on the customer's default. The term loan option wrongly treats it as fund based.

Did you get it right without looking?

One question tells you little. A timed set on Raising of Funds - Non Fund Based shows your real accuracy, how long you take and where you lose marks.

Practise Raising of Funds - Non Fund BasedFree diagnostic mock

More Raising of Funds - Non Fund Based questions