What is a Cash Credit Loan? Process, Eligibility, and Advantages

A cash credit loan is a type of revolving credit that lets businesses borrow money up to a set limit whenever they need it. This flexible setup provides ongoing access to funds, which can be useful for covering short-term expenses and managing daily business costs. Many businesses find it helpful for handling their working capital needs. Here, we’ll go over the main features of cash credit loans and how they work.

What is Cash Credit?

Cash credit is a type of short-term loan that businesses use to cover their everyday expenses. It helps companies manage their working capital needs, such as paying suppliers or covering operational costs. Banks and other financial institutions provide this kind of loan, making it easier for businesses to access the funds they need quickly.

With cash credit, businesses can withdraw money up to a set limit, which they can pay back over time. The interest is only charged on the amount borrowed and not on the entire borrowing (credit) limit. This flexibility is essential for keeping operations running smoothly.

The cash credit limit is based on the following factors:

• Funds required
• The credit profile of the borrower
• Current assets and current liabilities of the business organisation
• Past track record
• Collateral/security provided in exchange for a cash credit facility
• Repayment capacity of the borrower

Highlights of Cash Credit

Cash credit is a flexible funding option that banks offer to businesses or individuals, allowing them to draw funds as needed, up to a specified limit. This is a secured form of credit, so the bank usually requires collateral as a guarantee.

One important factor in cash credit approval is the business's “vintage”—basically, how long the business has been running and active. This helps the bank assess the reliability of the borrower. While overdrafts are assessed based on a person’s individual credit, cash credit relies on the business’s financial history to establish creditworthiness.

It’s worth noting that, unlike an overdraft that you might take from your current account, cash credit involves opening a specific loan account with the bank. There may also be some commitment fees involved in keeping this credit line active.

Important Features of Cash Credit Loans

1. Borrowing Limit

   • Depends on the applicant’s borrowing power or creditworthiness
   • Can withdraw as many times up to the borrowing limit

2. Interest

   • Interest is charged only on the amount withdrawn and not on the entire borrowing limit

3. Minimum commitment charge

   • The minimum charge needs to be paid regardless of whether the loan amount is used or not

4. Collateral security

   • Secured against assets and stocks

5. 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 its 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. 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 utilises the cash credit or not.
• The interest rate applied to cash credit loans 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 the 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 includes:

• 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 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

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Frequently Asked Questions (FAQs)

1. What loan amount can I get through the Cash Credit facility?

   The loan amount you can get depends on how much stock and receivables your business has.

2. Who is eligible for this facility?

   Anyone can apply for a cash credit loan, including individuals, manufacturers, retailers, distributors, companies, partnerships, sole proprietorships, LLPs, trusts, and societies.

3. How can I use the money from my Cash Credit limit?

   You can use the funds to cover your working capital needs or to help expand your business.

4. What’s the difference between a business loan and cash credit?

   A business loan is a fixed amount you borrow at a specific interest rate, which you repay over a set time. In contrast, cash credit is a flexible short-term loan where you have a credit limit that you can draw from as needed.

5. How do banks decide on the loan limit?

   Banks calculate the cash credit limit based on your profile, how long you've been a customer, the financial health of your business, your ability to repay, and your credit score.

6. What can I use as collateral for a cash credit loan?

   You can use items like raw materials, inventory, and finished goods as collateral. For larger loans, banks might also ask for machinery to be used as security. Remember, the loan amount will be less than the value of your collateral. If you fail to repay, the bank can sell your collateral to recover the loan.

7. How does a cash credit loan differ from an overdraft?

   A cash credit loan is secured by current assets, while an overdraft is based on your credit score and investments. Cash credit typically lasts a year, whereas overdrafts can be for shorter periods, like a month or a few months, and usually require a separate account.

8. What can I use a cash credit loan for?

   You can use a cash credit loan to manage everyday business expenses, like buying raw materials, maintaining stock, paying salaries, and covering rent.

9. Do banks require collateral for Cash Credit limits?

   Yes, banks typically ask for collateral, which can include residential and commercial properties, before they approve a cash credit limit.

10. What fees should I expect with a cash credit loan?

    Banks typically charge a processing fee for things like inspecting your business or valuing your assets. This fee usually ranges from 1% to 3% of the approved limit, but it can also be a fixed amount. Most banks don’t charge foreclosure fees, but if they do, these fees can range from 0.5% to 2% of the loan amount.