With cash credit, you can withdraw money from a current account without maintaining a credit balance, but you are restricted by the commercial bank’s borrowing limit.
The interest is not calculated for this facility on the cash credit loan limit, which the bank sets, but on the daily closing balance. Banks often offer CCs as a convenience. A short-term loan is an important source of finance for a business. They are readily available as well. It can help you with:
- Financing sales operations
- Purchasing stores, raw materials, fuel, etc.
- Paying up power charges, labour wages, storing goods
Difference between cash credit and an overdraft
Short-term loans are known as cash credit. These loans are meant to provide quick working capital for entrepreneurs. Long-term financial assistance, on the other hand, is an overdraft facility. Under such a facility, you can withdraw money despite having no balance in your account.
These are generally considered credit facilities offered by lenders to borrowers. Using the company’s inventories as collateral, your lender hypothecates them. In addition, some lenders will accept bank statements. On the surface, cash credit and overdrafts may seem similar. Yet, these financial products are completely different. The limit of cash credit that you can enjoy is subject to certain conditions:
- The funds you require
- The credit history you have
- Past track records concerning cash crediting
- Repayment capacity
- Security or collateral you require for securing this loan type
Advantages of cash credit over other forms of financing
- A cash credit loan is an excellent form of finance that does not require a company to liquidate its assets.
- Once collateral security is pledged, the bank can easily arrange a cash credit loan.
- If you have excess funds, make a deposit to reduce interest costs.
- Tax-deductible interest on credit cash loans
- The interest you pay on a loan is only related to the amount borrowed.
- Flexibility is provided to you.
- Cash credit loan withdrawals are unlimited as long as you remain within its withdrawal limits.
Features of a cash credit
Running balance interest
Unlike traditional debt financing methods such as loans, cash credit accounts only charge interest on the running balances, not on the total borrowing limit.
Depending on a borrower’s creditworthiness, cash credits have a lending limit. A company can borrow a limited amount of funds depending on its repayment capabilities.
Securities, fixed assets, or properties are commonly used as collateral for securing credit.
Minimum commitment charge
Regardless of whether the borrower utilizes the available credit, there is a minimum charge for establishing the loan account. For example, banks often include a clause requiring borrowers to pay a certain minimum interest rate on the withdrawn amount or a predetermined amount.
Credit Period Validity
Limited drawing power is allowed for one year. After that, drawing power is reassessed. An evaluation can occur every quarter in some cases, whereas in other cases, it may occur once a year. Depending on the institutions’ policies and individual cases, the process would differ.
Security is required to extend a cash credit facility. There can be primary securing assets such as stocks, debtors, etc., and collateral securing assets such as fixed assets and other immovable properties.
Processing your cash credit
After the bank or lender receives the cash credit application, it assesses the business’ assets and liabilities and approves the cash credit limit. Generally, the higher the cash credit limit, the stronger the business financially. Businesses can withdraw these facilities as often as they choose. Credit limit approvals do not affect interest rates. Only the borrowed amount is charged. A company’s creditworthiness and the collateral determine the interest rate it will be charged for withdrawing from the cash credit facility.