Cash Credit

Cash credit (CC) is a short-term loan facility offered by banks to businesses, allowing them to access funds up to a pre-approved limit, even if their account balance is zero, to meet their working capital needs.

Cash Credit:

Cash credit is a financial facility provided by banks and financial institutions, primarily to businesses, to help them manage their working capital requirements. It is a type of short-term loan that allows businesses to borrow funds up to a predetermined limit to meet their day-to-day operational expenses, such as purchasing inventory, paying salaries, or covering other immediate financial needs.

Key Features of Cash Credit:

1. Credit Limit:
   • The bank sets a maximum limit up to which the business can borrow. This limit is determined based on the business’s financial health, creditworthiness, and the value of the collateral provided.
2. Flexible Withdrawals:
   • Businesses can withdraw funds as needed, up to the credit limit. They only pay interest on the amount actually utilized, not on the entire credit limit.
3. Collateral:
   • Cash credit is typically a secured loan, meaning the borrower must provide collateral, such as inventory, receivables, or other assets. The collateral acts as security for the lender.
4. Interest Rates:
   • Interest is charged only on the amount withdrawn and for the duration it is used. The interest rate may be higher than other types of loans due to the flexibility and short-term nature of the facility.
5. Repayment:
   • Repayment is flexible, and the borrower can repay the amount at any time. The credit limit is replenished as repayments are made, allowing the borrower to reuse the facility.
6. Purpose:
   • Primarily used for working capital needs, such as purchasing raw materials, managing inventory, or covering short-term liabilities.

Advantages of Cash Credit:

• Flexibility: Businesses can withdraw and repay funds as needed, making it a convenient option for managing cash flow.
• Interest Savings: Interest is charged only on the amount utilized, which can lead to cost savings compared to a term loan where interest is charged on the entire loan amount.
• Reusable: As repayments are made, the credit limit is restored, allowing businesses to reuse the facility.

Disadvantages of Cash Credit:

• Collateral Requirement: The need for collateral can be a barrier for some businesses, especially small or new enterprises.
• Higher Interest Rates: The interest rates on cash credit can be higher compared to other types of loans.
• Short-Term Nature: Cash credit is designed for short-term needs and may not be suitable for long-term financing requirements.