<\/span><\/h2>\n\n\n\nThere are few steps in which cash credit can work, which include:<\/strong><\/p>\n\n\n\n\n- Step 1: The business applies for the loan.<\/strong> The lender will assess your business and working capital requirements.<\/li>\n<\/ul>\n\n\n\n
\n- Step 2: The lender sanctions the limit.<\/strong> The lender determines what will be the maximum amount the business can use. <\/li>\n<\/ul>\n\n\n\n
\n- Step 3: The borrower withdraws the fund.<\/strong> The business will use the sanctioned limit according to the facility’s terms.<\/li>\n<\/ul>\n\n\n\n
\n- Step 4: Some interest is charged on utilization.<\/strong> The interest is entirely based on the amount that has been utilized; it is not simply the entire sanctioned limit. <\/li>\n<\/ul>\n\n\n\n
\n- Step 5: The facility gets reviewed.<\/strong> This depends on the lender and facility; the limit and terms are reviewed periodically<\/li>\n<\/ul>\n\n\n\n
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\u2019s terms.<\/p>\n\n\n\n
<\/span>Features of Cash Credit<\/span><\/h2>\n\n\n\nThe main features are<\/strong>:<\/p>\n\n\n\n\n- There is a sanctioned borrowing limit:<\/strong> The borrower will receive the maximum limit rather than necessarily receiving an entire amount directly<\/li>\n\n\n\n
- It is working capital focused:<\/strong> Cash credit is generally designed to fulfill the short-term business fund need. <\/li>\n\n\n\n
- There is a flexible utilization:<\/strong> The borrower can withdraw the funds as required, which comes under the sanctioned limit<\/li>\n\n\n\n
- Interest on utilized amount:<\/strong> There is an application on the actual amount that has been used; that is subject to the lender’s terms and conditions<\/li>\n\n\n\n
- It may require some security:<\/strong> Depending on the lender and its facility, a cash credit may be secured against the assets such as inventory and receivables<\/li>\n<\/ul>\n\n\n\n
<\/span> What Is Cash Credit Used For?<\/span><\/h2>\n\n\n\nA cash credit has many uses; depending upon the requirement, the examples of it includes:<\/p>\n\n\n\n
\n- Purchasing inventory or raw materials<\/strong><\/li>\n\n\n\n
- Paying suppliers<\/strong><\/li>\n\n\n\n
- Managing some short-term operating expenses<\/strong><\/li>\n\n\n\n
- Bridging temporary cash-flow gaps<\/strong><\/li>\n\n\n\n
- Meeting working-capital requirements<\/strong><\/li>\n\n\n\n
- Managing seasonal business demand<\/strong><\/li>\n<\/ul>\n\n\n\n
Cash credit is generally created for some business-related working capital, rather than just managing personal expenses.<\/p>\n\n\n\n