What Is Cash Credit? Meaning, Features, Eligibility & How It Works

Businesses have to manage their day-to-day expenses, such as purchasing any inventory, paying the suppliers, or any operating cost. A cash credit is a kind of facility that provides access to working the capital without requiring the borrower to take an entire amount like a traditional loan. 

It is a short-term facility to borrow that will allow the eligibility for businesses to withdraw funds up to a sanctioned limit that will allow the eligibility for businesses to withdraw funds up to a sanctioned limit; usually it is against a specified security or a collateral. Interest is typically a charge on the amount that is used rather than an entire sanctioned limit.

What Is Cash Credit?

Cash credit is a facility that banks provide primarily to the businesses as a short-term loan up upto a certain limit. Businesses can withdraw this money whenever they feel that their account lacks the needed fund. And the borrowing limit depends on the business’s financial position and their eligibility factor; the borrower can withdraw the amount within the required amount. This is generally a short-term business need, such as supply payments, operating expenses, and inventory. Unlike the traditional loans, cash credit works as a revolving credit facility, meaning businesses can withdraw, repay, and borrow again within the predetermined limit set by the bank.

How Does Cash Credit Work?

There are few steps in which cash credit can work, which include:

• Step 1: The business applies for the loan. The lender will assess your business and working capital requirements.

• Step 2: The lender sanctions the limit. The lender determines what will be the maximum amount the business can use. 

• Step 3: The borrower withdraws the fund. The business will use the sanctioned limit according to the facility’s terms.

• Step 4: Some interest is charged on utilization. The interest is entirely based on the amount that has been utilized; it is not simply the entire sanctioned limit. 

• Step 5: The facility gets reviewed. This depends on the lender and facility; the limit and terms are reviewed periodically

For example, a business receives a cash credit limit of up to 10 lakh, but they use only 4 lakh. The interest will be calculated based on the utilized amount; it will be subject to the lender’s terms.

Features of Cash Credit

The main features are:

• There is a sanctioned borrowing limit: The borrower will receive the maximum limit rather than necessarily receiving an entire amount directly
• It is working capital focused: Cash credit is generally designed to fulfill the short-term business fund need. 
• There is a flexible utilization: The borrower can withdraw the funds as required, which comes under the sanctioned limit
• Interest on utilized amount: There is an application on the actual amount that has been used; that is subject to the lender’s terms and conditions
• It may require some security: Depending on the lender and its facility, a cash credit may be secured against the assets such as inventory and receivables

 What Is Cash Credit Used For?

A cash credit has many uses; depending upon the requirement, the examples of it includes:

• Purchasing inventory or raw materials
• Paying suppliers
• Managing some short-term operating expenses
• Bridging temporary cash-flow gaps
• Meeting working-capital requirements
• Managing seasonal business demand

Cash credit is generally created for some business-related working capital, rather than just managing personal expenses.

Cash Credit Eligibility

There are some eligibility criteria that the lender uses, which includes:

• The type and age of the business
• Business turnover
• Financial statements
• Banking transactions
• Existing liabilities
• Repayment history
• Working-capital requirements
• Available security/collateral
• Credit profile of the business/promoters, where relevant

Then the eligibility criteria, documentation, sanctioned limits, and security requirements vary depending upon the lender.

Documents Required for Cash Credit

The documents vary from lender to lender, so documents that may be required for:

• Identity and address proof
• Business registration documents
• PAN and applicable tax documents
• Bank statements
• Financial statements
• Income-tax returns
• GST-related records, where applicable
• Details of existing loans or liabilities
• Documents related to collateral/security, if required

Advantages of Cash Credit

The advantages of working capital include:

1. It will give access to the working capital: It will help the businesses to manage short-term cash-flow requirements.
2. There will be flexible withdrawals: Businesses may draw funds as they are needed rather than borrowing in the entire limit at once.
3. It will help to potentially lower the interest burden on any unused funds: Since the interest is generally based on the utilization, the cost will be lower than borrowing the full sanctioned amount upfront, which depends on the lender’s terms and charges.

Disadvantages / Things to Consider

The disadvantages or the things to consider would involve

• Interest rates and other charges, which may vary by lender.
• Security or collateral can be a requirement 
• The sanctioned limit may not cover all the business needs.
• The facility might involve some periodic reviews.
• Non-repayment or regularization of utilization can affect the borrower’s credit profile and financial position.
• Companies need to manage withdrawals carefully so they don’t become too dependent on short-term borrowing.

Cash Credit vs. Personal Loan

 Cash Credit vs. Cash Loan

People sometimes use these terms interchangeably, but they refer to different borrowing conditions. Both cash credit and cash loan differ in how their funds are disbursed, how the interest is charged, and how they are paid back. A cash credit is a facility that involves a sanctioned limit to which we can utilize the money as needed, while a conventional loan involves a fixed amount that is disbursed to the borrower and paid back according to the schedule.

Must Read – Loan Moratorium Period: Meaning, Interest Impact, and RBI Rules

FAQs

Final takeaway

Cash credit is mainly a business working capital facility that provides access to funds up to a sanctioned limit. It can help businesses to grow, manage inventory, and make supplier payments and a cash requirement that is short-term. So, the interest rate, fees, collateral requirement, and eligibility criteria vary from lender to lender. So before choosing a cash credit facility, businesses should understand the borrowing limit, total cost, repayment terms, and other conditions.