A cash credit loan is a cash loan given to a company to meet its working capital requirements. It is a short-term source of finance with a tenure of up to 12 months.
A cash credit loan allows a company to withdraw money from a bank account. You can withdraw as many times, but up to its withdrawal limit.
The borrowing limit is decided on the basis of the applicant’s credit history or creditworthiness, which is based on the company’s structure of the current assets and liability. Additionally, the interest is only charged on the amount borrowed and not on the entire borrowing limit.
Cash credit loan is offered to companies to bridge the working capital gap.
The cash credit can be used for the following:
- Buying raw materials, stores, fuel, etc.
- Paying labour wages, power charges, for storing goods until sold
- Financing the sales
Cash credit loan is granted against security.
The cash credit loan is granted only when it is hypothecated against stock and assets of the company. The security can be in the form of the following:
- Raw materials
- Finished goods
- Stock-in-trade (including stores and spares)
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|Interest||– Interest is charged only on the amount withdrawn and not on the entire borrowing limit|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 and Disadvantages of Cash Credit Loans
|A cash credit loan provides an excellent form of finance without the company worrying about liquidating their assets.||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.|
|The bank can easily arrange for a cash credit loan as long as the loan value is determined, and collateral security is pledged.||New companies can have difficulty obtaining this loan as the approval depends on the proven track record of profit and collateral security offered.|
|You are given the flexibility to:
||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.|
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- Pay interest only on the amount used
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