What is Cash Credit?

Cash credit is a short-term financing source for a company. It is one kind of short-term loan extended by a bank to a company. The account is restricted to only borrowing up to the limit of borrowing. In addition, interest is charged not on the borrowing limit but the amount borrowed. You can read further to know the actual cash credit meaning and its other facts.

Features of Cash Credit  

Check out some of the crucial features of cash credit which are as follows:

1. Interest on Running Balance

The interest is charged not on the total borrowing limit but on the running balance of the cash credit account in contrast with other traditional debt financing methods like loans. 

2. Borrowing Limit

Cash credit is introduced with a borrowing limit decided by the creditworthiness of the borrower. A company can withdraw money up to its prescribed borrowing limit.

3. Credit Period

Cash credit is usually provided for a maximum duration of 12 months after the re-evaluation of the drawing power.

4. Minimum Commitment Charge

The short-term loan is presented with a minimum charge for setting up the loan account regardless of whether the borrower makes use of the available credit. For instance, banks usually involve a clause that needs the borrower to pay a minimum interest amount on the withdrawn amount or a predetermined amount, whichever is higher.

5. Collateral Security

The credit is often secured with the use of property, fixed assets, or stocks as collateral.

Benefits of Cash Credit

Have a look at a few of the advantages of cash credit which are as follows:

1. Easy Arrangement

It can be arranged by a bank easily as the offered collateral security is accessible to be guaranteed and the achievable value of such is determined easily. 

2. Flexibility

One can make withdrawals many times on a cash credit within the borrowing limit and excess fund deposits into the account reduces the burden of interest that the company faces. 

3. Interest Charged

A cash credit lowers the cost of financing of the borrower as the interest is charged only on the minimum commitment charge or the utilized amount. 

4. Source of Working Capital Financing

Cash credit is a crucial source of working capital financing as the company does not need to be concerned about liquidity problems. 

5. Tax-deductible

Payments of interest are tax-deductible and therefore, it decreases the overall burden of tax on the company. 

Difference between Cash Credit and Overdraft

Normally, cash credit and overdraft are identified as the same funding items but there are still nine differences between both which you should understand.

FAQs related to Cash Credit

1. What documents are needed to avail a cash credit loan?

• Business plan
• Duly filled application form along with passport-sized photographs
• Business PAN card
• Business address proof
• Business Incorporation Certificate
• Information of security or collateral to be submitted
• Income proof of last six months’ bank statement
• Ownership proof: Company’s deed
• KYC documents like Voter’s ID card, Applicant’s Passport, PAN card, Driving License, Utility Bills (Electricity/Water Bills), Aadhar card
• Any other document needed by the lender

2. What is the procedure of a cash credit loan?

The very first step of the procedure is that the lender or bank sanctions a limit to an enterprise or business and the business can withdraw funds from the assigned limit as per their requirements. But, the limit sanctioned by the lender or company relies on the existing liabilities and assets of the business. Financially sound and robust establishments are sanctioned with higher limits in comparison to companies with lower credit scores or finance. The rate of interest charged by the lender or bank relies on the creditworthiness and submitted collateral by the organization.

3. How does cash credit operate?

Cash credit allows an organization to withdraw funds from a bank account. One can withdraw funds a number of times until the total sanctioned limit is reached. The limit of cash is determined by the lender according to the applicant’s CIBIL score, profile, and creditworthiness. These factors are on the basis of the company structure of the borrower and its assets as well as liabilities. 

4. What are the salient features of cash credit?

• Cash credit is a short-term loan with a repayment duration of 12 months or 1 year.

• Cash credit is usually provided against security or collateral.

• The rate of interest charged by the lender is not on the sanctioned credit limit but the money withdrawn.

• Cash credit can be repaid in form of half-yearly, quarterly, or monthly repayments.

• A higher limit can be achieved by companies with good credit history.

• The rate of interest paid on a cash credit loan is tax-deductible.

• The credit limit is sanctioned by taking the company’s turnover into consideration.

• Funds can be withdrawn any number of times as per the sanctioned limit.

• The lender has a choice of recalling sanctioned amount at short notice

• Individual borrowers can even take the benefit of cash credit against their fixed deposits.

5. What is the difference between cash credit and a loan?

A loan is a term loan rendered by a financial institution at a prescribed rate of interest to be repaid within a certain period of time. On the other hand, cash credit refers to a short-term working capital loan in the form of a credit limit provided to an organization by a bank. 

6. What is a cash credit loan?

A cash credit loan is a kind of working capital loan in which funds can be withdrawn against the hypothecation of receivables and stocks. Cash credit assists businesses immediately in overcoming the situation of cash crunch during the business period. In fact, this working capital loan can be enjoyed either in kind of unsecured loan or secured loan. The business is restricted to borrow only up to the prescribed limit from the lender or business. Above all, business requires to submit security or collateral to get the benefit of a cash credit loan. However, the collateral that needs to be submitted should be in the form of stock-in-trade, fixed assets, finished goods, raw materials, property, equipment, etc.