Cash Credit Loan: Procedure, Eligibility, and Advantages
What is Cash Credit?
A cash credit is a working capital loan offered to a business entity to meet its working capital requirements. It is a short-term source of finance with a tenure of up to 12 months, which can be renewed upon completion of the loan.
Cash credit loan allows businesses to borrow amounts from their bank account over and above their account balance, as many times as they want, up to the pre-specified borrowing limit. However, the interest is only charged on the amount borrowed and not on the entire borrowing (credit) limit.
The cash credit limit is based on the following factors
- Funds required
- Credit profile of the borrower
- Current assets and current liabilities of the business organization
- Past track record
- Collateral/security provided in exchange for a cash credit facility
- Repayment capacity of the borrower
Cash credit helps businesses bridge the working capital gap and use the funds for the following
- Buying raw materials, stores, fuel, etc.
- Paying labour wages, power charges, for storing goods until sold
- Financing the sales
Important Features of Cash Credit Loans
- Borrowing Limit
- Depends on applicant’s borrowing power or creditworthiness
- Can withdraw as many times up to the borrowing limit
- Interest
- Interest is charged only on the amount withdrawn and not on the entire borrowing limit
- Minimum commitment charge
- The minimum charge needs to be paid regardless of whether the loan amount is used or not
- Collateral security
- Secured against assets and stocks
- Credit tenure
- Up to 12 months
Advantages of Cash Credit Loans
- A cash credit loan provides an excellent form of finance without the company worrying about liquidating their assets.
- The bank can easily arrange for a cash credit loan as long as the loan value is determined, and collateral security is pledged.
- You are given the flexibility to
- Withdraw as many times from your available cash credit loan up to its withdrawal limit.
- Deposit whenever you have excess funds to lessen the burden of interest.
- Interest paid on your credit cash loan is tax-deductible.
- You pay interest only on the amount you borrow.
Disadvantages of Cash Credit Loans
- Since it is a short-term (temporary) loan, a company cannot rely on it for an extended period of time. After the cash credit loan expires, it can be renewed, but the terms and conditions are re-evaluated.
- New companies can have difficulty obtaining this loan as the approval depends on the proven track record of profit and collateral security offered.
- You have to pay the minimum commitment charge regardless of whether the company utilizes the cash credit or not.
- The interest rate applied to cash credit loan is very high.
Eligibility for Cash Credit Facility
A cash credit facility is a loan offered to any individual over the amount available in their account at interest charged on the funds borrowed. The following are eligible for a cash credit loan
- Individuals
- Private limited Companies
- Partnership Firms
- Sole Proprietors/Professionals
- Registered Trusts
- Limited Liability Partnerships
- Public Limited Companies
- Co-operative Societies
Documents Required for Cash Credit Facility
The documents needed for a cash credit loan are usually KYC documents and other documents that help evaluate the nature and viability of the business. The list of documents include
- Duly filled application form with Passport-sized photographs
- KYC documents: Aadhar Card, Driving License, Passport, Voter’s ID card, PAN Card, Water/ Electricity Bills
- Income Proof: Last 6 months’ bank statement
- Business Incorporation Certificate
- Business PAN card
- Business address proof
- Ownership proof: Company’s deed
- Collateral/security details
- Any other document required by the lender
Cash Credit Loan Procedure
Once the cash credit application is submitted, the bank or the lender assesses the current assets and liabilities of the business and approves a cash credit limit. The stronger the business financially, the higher is the cash credit limit approved. Businesses can withdraw from this cash credit facility as many times as they want. The interest is charged only on the borrowed amount and not on the credit limit approved. The interest rate applied for withdrawing from the cash credit facility depends on the creditworthiness and the collateral submitted by the company.
Difference Between Cash Credit and Overdraft
Cash credit and overdraft are usually considered similar financial products because most of their features overlap each other. But, there are very distinct differences, which are outlined in the table below
| Features | Cash Credit | Overdraft |
|---|---|---|
| Borrowing limit | Based on stock volume and inventory | Based on financial statements and security deposits |
| Tenure | Short-term | Long-term |
| Interest rate | Lower than overdraft | Higher than cash credit |
| End-use | Used for meeting working capital requirements | Used for business and non-business purposes |
If your requirement is a small business loan of up to ₹ 5 Lakh, MoneyTap can help. It offers a credit line for business to help meet your day to day working capital requirements. With MoneyTap’s personal loan for businessman, you have the following benefits:
- Instant approval of a personal loan for up to ₹ 5 Lakh
- Low-interest rate
- Pay interest only on the amount used
