Capital is very important for any company to run its business. It has always been seen in the news that many companies that fall short of cash are unable to maintain their capital, and their business activities cannot be continued further. In this case, they are left with no option other than shut down their enterprises. Whenever any company falls short of capital, it has an option to take a loan from the bank at a prescribed interest rate.
The loan taken by the companies is used to continue further their business activities, including increasing their size of business, purchasing plants and machinery, and acquiring raw materials. They also hire more staff from these loans and pay off their salaries. Cash Credit Loan is essential for a company to meet its working capital requirements. However, whenever a company falls short of cash, it can take a loan, keeping in mind the Cash Credit loan eligibility in short-term funding and maintaining its capital. The article will help you make the best business loans and provide you with knowledge of MSMEs.
Did you know?
A cash credit loan means an excellent finance form where the company does not need to worry about diluting assets. The bank can easily provide a cash credit loan as long as the loan value is determined and security is provided to avoid KYC frauds. Cash credit loans are great for individuals who have difficulty meeting their business's operational requirements. Companies must invest money in their day-to-day operations. Companies with insufficient cash inflow can benefit from a running account for working capital. It's especially useful for seasonal enterprises with high sales only during specific months of the year.
Also Read: Importance of Credit Information for a Fresh Borrower
Understanding Cash Credit Loan
Cash Credit Loan means cash credit which is temporary financing that companies can also maintain their working capital requirement. It is crucial to maintain past good credit history and financial stead from the bank to avail these temporary finances. The uses of this loan are various. For example, this loan may be used to increase the size of the business and buy different plants and machinery that will further help create a lot of capital goods. Additionally, this loan may also be used for giving salaries to the hired staff. Credit cash loan has a maximum validity of 1 year, which can further be renewed.
A Cash Credit Loan is one of the categories of working capital loans, and this loan is very helpful when there is a cash crunch situation as it helps businesses get over tough times. The working capital loan can be taken either in the form of a protected loan or an unprotected loan. There is a limit to availing a loan from the lender, and for availing a loan, some security must be submitted.
Thus Cash Credit Loans are quite beneficial for companies who might need capital, especially in their initialisation period, to keep their business stable and run.
Difference Between Cash Credit and Overdraft
|
S. No. |
Cash Credit Loans |
Overdraft |
|
1 |
Accessed primarily for commercial objectives such as working capital. |
Accessed for various purposes, particularly business-related ones. |
|
2 |
The loan amount is determined by the sales and inventory quantity. |
The financial information and security deposits determine the size of the mortgage. |
|
3 |
Over the duration, the limit doesn't really decrease. |
In an overdraft, the monthly income is reduced. |
|
4 |
A second account must be created to receive Cash Credit. |
On the individual's existing account, overdraft access is provided. |
|
5 |
At least one year is required. |
Afforded for a shorter period of time, such as a particular month, with a total of one year. |
|
6 |
Individual people, retail chains, brokers, producers, distribution companies, businesses, partnering, sole proprietors, LLPs, and other entities can use it. |
Bank customers of the particular bank can use this service. |
|
7 |
The sum sanctioned is determined by the performance of the company and market conditions. |
Market data and bulk amounts are used to determine the Overdraft Limit. |
Features of Cash Credit Loans
Following are some of the characteristics of Cash Credit Loans:
1. Maximum Loan Amount
A cash credit has a debt ceiling established by the lender's creditworthiness. A corporation can make withdrawals up to the money it has borrowed.
2. Cash Credit Interest On The Balance Sheet
Unlike other predicting bankruptcy financing options such as mortgages, the interest levied on the cash credit in the banking user's operating balance, not the overall lending limit, is paid.
3. Pay For A Minimum Commitment
Irrespective of whether the borrower uses the credit available, the quick loan comes with a minimum price for opening the loan account. Banks, for instance, often include a stipulation requiring the lender to pay at least the level of interest on a predetermined sum or the sum taken, whichever one is greater.
4. Collateral Protection
Securities, capital equipment, and real estate are frequently used as collateral security credit.
5. Term Of Credit
Cash credit is usually issued for 12 months before the withdrawing power is re-evaluated.
Collateral For Cash Credit Loans
There are a few documents required for taking cash credit, such as
- Income reports for at least 6 months, confirmed by a CA
- IT will be back for at least a year
- Repayment history for loans
- Evidence of collateral
- The bank may also require other necessary documentation
It could be easily identified if we talk about collateral required for cash credit loans. Liquid securities are considered acceptable collateral by some borrowers in the market. On the other hand, other lenders only take real property or goods as collateral. You should verify with your creditor to see if liquid securities are suitable
Also Read: What is Equifax Credit Score and Credit Report?
Benefits Of Acquiring Cash Credit Loans
The following are the advantages or benefits of availing of Cash Credit Loans:
- The borrower of a loan is not supposed to pay any interest rate on the withdrawal of an amount of money or when the money is used up.
- For getting a certain amount of loan sanctioned, a particular CIBIL score check is required, but in the case of Cash Credit Loans, any such CIBIL score is not required.
- Once the loan amount is credited into the borrower's account, tax is subtracted from the interest paid upon the loan money availed.
- Cash Credit Loans are quick and subtly accessible, and the loans also have quite a high degree of flexibility in their operations and credit of loan into a person's account.
List Of Banks That Provide Cash Credit Loans
Several banks on the list provide Cash Credit Loans to make companies financially sound to carry on their business activities. However, it should be noted that this loan provided by the banks is given under certain limits. We are going to see a few banks that provide this loan. The name of big banks like HDFC Bank, ICICI Bank, Punjab National Bank, Axis Bank and Bank of Baroda bank in the list; there are several other banks as well, including IDBI Bank, RBL Bank, Yes Bank, J&K Bank, IDFC first bank, Kotak Mahindra Bank, Canara Bank, Bajaj Finserv Bank.
Conclusion
From the other article, it is very easy to find out the importance of Cash Credit Loans, and they can prove to be a boon for the companies facing a financial crunch. When we see the financial terms and conditions of a company, it is observed that a particular company is supposed to maintain a specific capital with them in the absence of which they might face economic turbulence in their business operations. If such a situation arises with a company, Cash Credit Loans come to their rescue. This loan helps the companies for an individual to generate a sufficient amount with the help of the loan availed on low rates of interest, and the period of repaying the loan is also less than 12 months or a year. However, this does not mean that the loans can only be given to the companies and not to the individuals. Individuals are also entitled to Cash Credit Loans against their fixed deposits. While taking loans, the companies and the individuals need to consider a few pointers: they need to pay back the loan amount and the interest value within a specific time.
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