written by | June 6, 2022

×

Table of content


Table of content

What is a Cash Credit Loan - Interest Rates, Eligibility, How to Apply

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.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: Give an example of a Cash Credit Loan?

Ans:

When a company has to meet its expenditure while waiting for its produced goods inventory to transform into cash, it can take up a Cash Credit Loan to run its business without a shortfall in the capital available to run the business.

Q: What is a CIBIL score in regards to Cash Credit Loans?

Ans:

CIBIL, which stands for Credit Information Bureau (India) Limited, is a three-digit score summary of a person's loan credit history. The score is determined based on a person's credit history recorded in the CIBIL report, also known as Credit Information Report or CIR. An Individual's CIR displays a person's credit payment history across the various loans and credit organisations over a particular period.

Q: Is it necessary for the banks to collect security before approving the cash credit limit for the businesses?

Ans:

 Yes, it is very much important for the banks to collect security before approving any loan; banks adhere to this guideline very strictly and take security before giving Cash Credit Loan limits to the businesses; apart from the security, banks also collect residential and commercial documents from the applicant before approving the loan.

Q: How do banks calculate the Cash Credit Loan limit?

Ans:

It depends upon the profile of a loan taker and how good the relationship of a loan taker is with the bank. Apart from it, there are other factors as well that that determine the cash credit limit; those factors are financial steadiness of business, the capability of a loan taker to repay it as per the given time limit and the most important thing in determining the cash credit limit is how good are the credit scores of an applicant.

Q: How to distinguish between cash credit in banking and business loans?

Ans:

A business loan is a loan offered by any financial establishment at a particular rate of interest must be repaid under a fixed period; on the other hand Cash Credit Loan is a type of loan which has a short period of working capital loan which is a type of a credit limit provided by a bank to any business.

Q: What loan amount can businesses avail of under the Cash Credit Loan facility?

Ans:

The amount that the businesses can avail of depends upon the size of stocks and how much receivables are possessed by a unit.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.