Fund and Non-fund Liability

Loan is the liability in which the company borrows money from the bank to expand its business. Besides loans, banks or financial institution can help the company in many different form such as LC, overdraft, bank guarantee, and so on.

These types of facilities are divided into two main categories which are funded facility and non funded facility.

Funded Facility

Funded facility is the loan that the bank provides cash directly to their clients. They are consist of bank loans, LC (letter of credit), Cash Credit, Cash Finance, and so on. The bank or financial institute will provide real cash to their client not only the commitment. They can earn money by charging interest base on the agree rate, time and amount of facility.

The clients will record this type of liability in their balance sheet plus the interest expense in the income statement.

Bank Loan

This is the normal loan in which banks give cash to clients for any purpose. The client will use the cash to pay for daily operation and expansion. They are require to pay back principal and interest on a specific date base on the repayment schedule.


Overdraft is the credit line which the bank allow the company keep continue withdrawing the money even the balance is zero. The limit depends on the agreement between the company and the bank. This type of loan usually contains a high-interest rate but it does not require any colleterial.

Cash Credit

Cash Credit is the credit line which the bank allows the company to access at any time. However, the balance cannot over the limitation.  It is a short-term loan which has a high-interest rate.

Commercial mortgage

A commercial mortgage is a loan which secure by the company property such as an office building, shopping mall, or factory. This type of loan usually used to acquire, refinance, or develop the property.

Non-Funded Facility

Non-Funded Facility is the type of instruments in which the bank provide only the commitment on behalf of their client. The bank or financial institution does not provide real cash to their clients but they provide a guarantee to the third parties. It means that if the clients fail to complete the financial obligation with third parties, the bank will take full resposiblity.

Non funded is The contigent liability, it can become liability in the client‘s balance sheet depend upon the future even

Thease are the list of non funded facilities:

  • BAB
  • LC
  • Accepted Bill

Letter of Credit (LC)

Letter of credit is the letter issued by the bank to guarantee for payment on behalf of the client. It gives assurance to supplier to deliver the goods to client and guarantee payment for the supplier.  If the client can’t make payment to supplier, the bank will take full responsibility.

Financial Guarantee

It is the instrument which bank issue as the guarantor for their client’s financial obligation with the third parties.

Retention Money Guarantee

Retention Money guarantee is the document which banks issue to their client (constructor) to prove that they will fullfill the construction contract even the last payment has been made. The client will use this document as a guarantee with their customers to ensure they can receive payment in advance.