What is Cash Credit?

Money Credit is momentary financing or advances for an organization to meet its functioning capital necessities. Money credit has advance reimbursement residency of one year. Bank offers advance to an undertaking relying upon the record of the candidate. Subsidizing obtained from cash credit advance can be utilized for different business purposes, like business development, purchasing a land, plant, and apparatus, buying crude materials, upgrading stocks, recruiting staff, taking care of compensations, undertaking training, obligations union, and so on.

What is Cash Credit Loan?

The cash credit loan is a type of working capital loan in which money can be withdrawn against the mortgage on stocks and accounts receivable. Question is  What is cash credit Cash credit instantly helps businesses overcome cash shortage situations during business tenure. This working capital loan can be used in the form of a secured loan or an unsecured loan. The business is limited to borrowing only up to the limit authorized by the lender. Companies must present a guarantee or collateral to take advantage of a cash credit loan in which the collateral to be presented can be in the form of fixed assets, stock in trade, raw materials, finished products, equipment, property, etc.

Cash Credit Loan Interest Rate

The interest rate to avail of the cash credit loan varies from bank to bank, which will change from time to time and depends on the creditworthiness and financial history of the applicant.

Salient Features on Cash Credit

  • The interest rate charged by the lender is on the money withdrawn and not on the sanctioned credit limit
  • A higher limit can be availed by businesses with good credit history
  • Cash credit is always offered against collateral or security
  • The credit limit is sanctioned considering the company’s turnover
  • Cash credit can be repaid in form of monthly, quarterly, or half-yearly repayments
  • The lender has an option of recalling sanctioned amount at short notice
  • The interest rate paid on cash credit loan is tax-deductible
  • Money can be withdrawn any number of times from the sanctioned limit

How Cash Credit Works?

Cash credit allows a business to withdraw money from a bank account. The money can be withdrawn multiple times until the total authorized limit is reached. The cash limit is defined by the lender based on the applicant’s profile, CIBIL score, creditworthiness. These factors are based on the borrower’s business structure and its assets and liabilities.

Documents Required

  • Duly filled application form
  • Pan Card
  • Business Plan
  • Passport-sized photographs of the applicant
  • Residence Proof: Voter’s ID card, Driving License, Passport, Ration Card, Telephone Bill
  • Identity Proof: Passport, Driving License, Voter’s ID card
  • Income Proof: Last 6 months’ bank statement and last 3 years’ audited financial documents
  • Business address proof: Ownership proof, property papers, house tax document, electricity bill
  • Details of existing loans and their repayment schedule
  • Details of collateral or security to be submitted
  • Partnership deed and Memorandum of Articles (MoA)
  • Valid Trade Licenses
  • Certificate under Shop Establishment Act
  • GST registration certificate

Cash Credit Loan Procedure

The initial step is for the bank or lender to impose a limit on a company or company and, from the assigned limit, the company can withdraw money according to its requirements. However, the limit sanctioned by the lender depends on the current assets and liabilities of the company. Strong and financially sound establishments are sanctioned with higher limits, compared to businesses with less financing or lower credit scores. The interest rate charged by the bank or lender depends on your creditworthiness and the collateral presented by the company.

Advantages and Disadvantages of Cash Credit Loans

Advantages Disadvantages
No collateral required Rate of Interest is High
Interest Rate on withdrawn or utilized amount Short-term Loan
No CIBIL score check is required Lesser repayment period of 12 months
Interest paid is tax deductible Difficult to avail by Startups
Quick and easily accessible with flexibility Used mainly to meet working capital requirements    
Cash Credit Making use of a cash credit loan becomes difficult if, due to market fluctuations, the performance of the business decreases during the tenure of the business. However, if business is doing well, the lender penalizes the cash credit at will, as the chances that your repayment capacity increases. The financial institution establishes a predetermined credit limit based on previous year’s performance, current year’s estimated performance, and projections for the next year. Businesses can reduce the burden of interest rates by depositing money at regular intervals or whenever possible.