Module: General Practice
Q115: Scenario: A textile manufacturer needs to purchase a new automated loom (machinery) expected to last 10 years. They also need funds to buy cotton bales (raw material) for the upcoming season. Action: The bank manager suggests a Term Loan for the loom and a Cash Credit limit for the cotton. Why is this structural distinction necessary?
✅ Correct Answer: A
Structural Distinction: 1. Term Loan (TL): Used for Capital Expenditure (Capex) like machinery.
The asset generates revenue over a long period.
Repayment (Installments) comes from the future cash profits (Net Profit + Depreciation) generated by the asset over its economic life.
2. Cash Credit (CC): Used for Working Capital (WC) needs (inventory/receivables). It is a "revolving" credit.
The outstanding amount fluctuates.
It is not "repaid" in the traditional sense but is "serviced" by the continuous realization of Current Assets (selling stock -> getting cash -> depositing in the CC account).
The asset generates revenue over a long period.
Repayment (Installments) comes from the future cash profits (Net Profit + Depreciation) generated by the asset over its economic life.
2. Cash Credit (CC): Used for Working Capital (WC) needs (inventory/receivables). It is a "revolving" credit.
The outstanding amount fluctuates.
It is not "repaid" in the traditional sense but is "serviced" by the continuous realization of Current Assets (selling stock -> getting cash -> depositing in the CC account).