Cash Credit Loan

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What is Cash Credit Loan?

A cash credit loan is a short-term source of finance, having a tenure of up to one year. Under the short-term finance option, the bank offers its applicant to take a loan up to a certain limit depending on their credit history.

This type of loan is extended to businesses and companies to fulfill their working capital requirement. This allows the customer, typically a business or company with a proven track record of profit, to withdraw money which is more than the balance available in their accounts. Cash credit is also known as Bank Overdraft facility.

Leading banks, such as IDBI Bank provides cash credit facility for businesses to finance their day-to-day requirement. The finance can be utilized for the purchase of raw materials, stores, fuel, for payment of wages for labor, power charges, for storing goods till they are sold out & for financing the sales by way of sundry debtors/receivables. Cash Credit facility is granted to companies to bridge the working capital gap, by way of a running account. The withdrawals are regulated and the withdrawal limit is arrived at based on the structure of current assets and liability.

Cash Credit (CC) is granted against hypothecation of stock and assets such as raw materials, work-in-process, finished goods and stock-in-trade, including stores and spares.

Features of Cash Credit
1. This loan is given to meet the working capital requirements of a business.
2. It is given against a collateral security.
3. Interest is generally charged only on the amount of loan taken by the customer and not on the amount of credit sanctioned.
4. This is a short-term loan with specified monthly/quarterly repayment structure as decided by the lender.
5. The applicant is allowed to withdraw the funds made available to him to meet the day to day working capital requirement by way of a running account.
6. A cheque book is issued in the name of the company and he can withdraw funds as per requirement
7. The applicant has the option to repay the loan as frequently as desired (daily/weekly), or as per the repayment, the structure is drawn by the lender.
8. Even individual applicants can avail this type of facility against their fixed deposits (as a loan) and save on interest.

Eligibility for cash credit loans

Some of the eligibility criteria outlined by lenders for cash credit loans are given as follows:

  • Most lenders require a minimum age of at least 25 years for the business owner. However, this criterion is likely to vary among the lenders in the market. You may have to contact the company to know the age limit required for this loan.

  • A business vintage of at least three years is good for securing this loan. Business vintage refers to the number of years the business has been in operation. This requirement is also likely to vary among lenders in the market. Some lenders provide loans for companies with a business vintage of just one year.

  • Some lenders expect businesses to have filed IT returns for at least one year. This proof must be submitted to the lender while applying for a loan.

  • Proprietorship firms, partnership firms, publicly traded companies, limited liability companies, etc., may apply for working capital loans. Some lenders have certain restrictions on the type of companies that can apply for working capital loans. You can contact the lender to know more details about this.

  • The borrower must provide collateral to be eligible for a cash credit loan. Most companies accept real estate properties as collateral for working capital loans. Other assets like inventory, work-in-progress goods, raw materials, etc., can also be pledged as security to avail this loan.

Important Features of Cash Credit
  • 1. Borrowing limit
  • A cash credit comes with a borrowing limit determined by the credit worthiness of the borrower. A company can withdraw funds up to its established borrowing limit.
  • 2. Interest on running balance
  • In contrast with other traditional debt financing methods such as loans, the interest charged is only on the running balance of the cash credit account and not on the total borrowing limit.
  • 3. Minimum commitment charge
  • The short-term loan comes with a minimum charge for establishing the loan account regardless of whether the borrower utilizes the available credit. For example, banks typically include a clause that requires the borrower to pay a minimum amount of interest on a predetermined amount or the amount withdrawn, whichever is higher.
  • 4. Collateral security
  • Cash credit is often secured using stocks, fixed assets, or property as collateral.
  • 5. Credit period
  • Cash credit is typically given for a maximum period of 12 months, after which the drawing power is re-evaluated.