Advances against book-debts

Book debts are typically made up of sums owed for goods or services supplied or work carried out on credit. Any sum due under a loan may also be treated as a book debt. Book debts in the balance sheet are classified as current assets (Trade Receivables).  However, it is important to know that all receivables are not book debts. Non-trade receivables like interest, income tax, insurance claims, and receivables from employees appear in balance sheets as ‘other receivables’.

Book-debts credit facility is available as working capital for the development of business against prime security of stock or book debts. Banks while financing against book debts do not consider bad debts and doubtful debts as book debts. The limit will be decided based on turnover (sales) / projected sales i.e. 20% of turnover (sales) or projected sales. The limit is subject to renewal after 12 months.

Advance against book debts is made by way of cash credit or overdraft. Under this system the bank allows the borrower to draw to the extent of the limit sanctioned to him provided the drawings are backed by adequate receivables. The margin for advances is normally in the range 30-40% of the book debts accepted as security.

Stock/Book debt Statements:  The borrower should submit monthly statements showing the outstanding book debts party-wise. The statements should be scrutinized concerning the age of the book debts and the drawing power. CA Certificate of book debts required on quarterly statements. A Cash Credit limit may also be sanctioned against stocks along with a sub-limit for book debts. In such cases, the borrower must submit a stock statement along with the book-debt statement.

Prime Security: A legal document called a deed of assignment transfers the ownership of a debt. The ‘ownership’ means the right to receive repayment of that debt from the same original debtor or borrower.

Collateral Security: Besides prime security of trade receivables, the borrower has to provide collateral security to the tune of 80% to 90% of the limit normally by way registered mortgage of immovable property.

Personal Guarantee: In addition to collateral security the borrower is normally asked to provide a personal guarantee from the person of worth to cover the lender’s exposure to the limit extended. This provides lenders with an extra layer of security and can help make credit more accessible to businesses.

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