Running Finance in Pakistan: A Deep Dive

Running finance, also known as cash finance or overdraft, is a crucial short-term financing facility in Pakistan’s business landscape. It provides businesses with readily available funds to meet immediate working capital needs, bridging gaps between receivables and payables. Unlike term loans with fixed repayment schedules, running finance operates as a revolving credit line.

How it Works: A business is sanctioned a specific credit limit, and it can withdraw funds up to that limit as needed. Interest is charged only on the amount withdrawn and for the duration it is utilized. As the business makes repayments, the available credit line replenishes, allowing for further withdrawals. This flexibility makes it ideal for managing fluctuating cash flows, seasonal demands, and unexpected expenses.

Benefits: The primary advantage is immediate access to funds. It avoids the delays associated with applying for fresh loans each time short-term capital is required. It also offers cost-effectiveness, as interest is only paid on utilized amounts. Furthermore, it allows businesses to take advantage of time-sensitive opportunities, such as bulk discounts on raw materials or meeting urgent customer orders.

Who Uses Running Finance? Small and medium-sized enterprises (SMEs) are the biggest beneficiaries. They often lack the financial resources of larger corporations and rely heavily on working capital to sustain operations. Trading businesses, manufacturers, and service providers commonly utilize running finance to manage inventory, cover operational costs, and fulfill contracts.

Eligibility and Requirements: Banks in Pakistan assess several factors when considering a running finance application. Key criteria include the applicant’s creditworthiness, business history, financial performance, and collateral. Typical requirements include a business plan, audited financial statements, bank statements, and details of security offered. Collateral can include property, stock, or other assets.

Interest Rates and Charges: Interest rates on running finance are typically linked to benchmark rates like KIBOR (Karachi Interbank Offered Rate), plus a bank-determined spread based on the borrower’s risk profile. In addition to interest, there may be other charges, such as processing fees, documentation charges, and renewal fees. These fees can significantly impact the overall cost of the facility, so it’s important for borrowers to compare offers from different banks.

Challenges: While beneficial, running finance also presents challenges. Maintaining a healthy cash flow is crucial to avoid exceeding the credit limit and incurring penalties. Interest rate fluctuations can also impact the cost of borrowing. Moreover, the availability of running finance can be affected by overall economic conditions and bank lending policies.

Conclusion: Running finance is a vital tool for Pakistani businesses needing flexible access to short-term capital. Understanding its mechanics, benefits, and challenges is crucial for businesses seeking to leverage this facility effectively for sustainable growth and operational efficiency within Pakistan’s dynamic financial environment.