Cash Credit

Cash credit is a crucial tool in the financial world. The need to manage capital is necessary for smooth operations in the company. Cash credit offers a flexible option for all companies that need easily accessible funds. The ease of access and cost-effectiveness have made cash credit a popular financial tool among business owners.

 

What is the meaning of Cash Credit?

Cash credit is a loan facility that banks offer to businesses. This allows the companies to withdraw funds from their current account within their pre-approved limits. The cash credit differs from a traditional loan front where the interest is charged on the entire sanctioned amount, whereas here, the interest only applies to the amount utilised. 

For example, if a business has a cash credit of INR 11 lakhs and utilises only four lakhs, then the interest will be charged on the four lakhs only.

 

Key Features of Cash Credit 

• Businesses can withdraw, repay, and withdraw again under their pre-approved amount.
• The interest is only charged to the amount used. 
• The cash credit amounts are secured based on collateral like assets or inventory.
• The grant period for a loan is typically 12 months but can be renewed on the performance evaluation.
• The working capital is managed with the help of cash credit, such as purchasing new materials or paying salaries.

 

How to Use the Cash Credit?

• Businesses must apply for cash credit in a bank or a financial institution with documents like balance sheets, profit and loss statements, and inventory details. 
• The banks assess the submitted documents, evaluate the creditworthiness and set up a cash limit. 
• After the approval, businesses can withdraw the funds 
• After the business can repay and renew the fund during the tenure 

 

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Frequently Asked Questions (FAQs)

How does the cash credit work?

The cash credit works in the following listed procedure: 

• Businesses must apply for cash credit from a bank or a financial institution with documents like balance sheets, profit and loss statements, and inventory details. 
• The banks assess the submitted documents, evaluate the creditworthiness, and set up a cash limit. 
• After the approval, businesses can withdraw the funds 
• After use, the business can repay and renew the fund during the tenure 

Are regular loans and cash credit different?

Yes! In a regular loan, the whole sanctioned amount has an interest, whereas, in a cash credit, only the utilised amount has an interest. The credit line is flexible in cash credit. 

What collaterals are required in the cash credit system?

The businesses can provide inventory, assets, fixed assets, or accounts receivable as collateral. 

Who is the cash credit available to?

Cash credit is primarily available to businesses, partnerships, corporations, and private limited companies.