Cash Credit(CC) – Nilesh Borhade

Understanding Cash Credit: A Lifeline for Business Financing

Cash credit is a vital financial tool that provides businesses with the flexibility to manage their working capital needs efficiently. This guide will delve into the intricacies of cash credit, its benefits, how it works, eligibility criteria, and common FAQs to help you make an informed decision.

What is Cash Credit?

Cash credit is a short-term financing option provided by banks and financial institutions to businesses for meeting their day-to-day working capital needs. It allows businesses to withdraw funds from their account up to a pre-approved limit, even if the account balance is zero. This facility helps businesses manage their liquidity and ensure smooth operations.

Benefits of Cash Credit

Cash credit offers several significant advantages:

Flexible Access to Funds: Businesses can withdraw funds as needed, up to the approved limit, providing flexibility in managing working capital.
Interest on Utilized Amount: Interest is charged only on the amount utilized, not on the entire credit limit, making it cost-effective.
Continuous Funding: Provides ongoing access to funds, ensuring that businesses can meet their operational expenses without interruption.
Improves Cash Flow: Helps maintain a steady cash flow by bridging the gap between receivables and payables.
No Need for Collateral: In some cases, cash credit can be availed without collateral, depending on the bank’s policies and the business’s creditworthiness.

How Cash Credit Works

Here’s a step-by-step overview of how cash credit works:

Application: The business applies for a cash credit facility with a bank or financial institution, providing necessary financial documents and business details.
Approval: The bank evaluates the application based on the business’s financial health, creditworthiness, and collateral (if required). Upon approval, the bank sets a credit limit.
Account Setup: A cash credit account is set up for the business, allowing it to withdraw funds up to the approved limit.
Withdrawal and Utilization: The business can withdraw funds as needed to meet its working capital requirements. The amount can be used for various purposes such as purchasing inventory, paying suppliers, and managing operational expenses.
Interest Calculation: Interest is charged only on the utilized amount, calculated on a daily or monthly basis, and debited from the cash credit account.
Repayment: The business repays the utilized amount as and when funds are available, either through deposits or incoming receivables.

Eligibility Criteria for Cash Credit

Eligibility for cash credit typically depends on:

Business Type: Generally available to businesses engaged in manufacturing, trading, or services.
Financial Health: Strong financial statements, including balance sheets, profit and loss accounts, and cash flow statements.
Creditworthiness: A good credit score and credit history enhance eligibility.
Business Vintage: Established businesses with a track record of stability and profitability are preferred.
Collateral: Depending on the bank’s policies, collateral such as inventory, receivables, or property may be required.

Understanding Interest Rates and Limits

Interest Rates: Cash credit interest rates can be fixed or floating, typically based on the Prime Lending Rate (PLR) or Marginal Cost of Funds based Lending Rate (MCLR) of the bank.
Credit Limit: The limit is determined based on the business’s working capital needs, financial health, and collateral. It is usually a percentage of the value of the collateral or the expected sales turnover.

The Cash Credit Application Process

Applying for cash credit involves several key steps:

Pre-Qualification: Determine your eligibility and estimate the required credit limit based on your working capital needs.
Documentation: Gather necessary documents, including financial statements, business registration, ID proof, and collateral details (if required).
Application Submission: Submit the completed application form along with the required documents to the bank.
Processing and Evaluation: The bank processes the application, evaluates the business’s financial health and creditworthiness, and assesses the collateral value.
Approval and Account Setup: Upon approval, a cash credit account is set up, and the credit limit is assigned.
Utilization and Repayment: Start utilizing the funds as needed and repay the utilized amount as and when funds are available.

Conclusion

Cash credit is a valuable financial tool for businesses looking to manage their working capital needs efficiently. By understanding the benefits, application process, and eligibility criteria, businesses can leverage cash credit to maintain a steady cash flow and ensure smooth operations. If you need expert guidance on cash credit, our experienced finance consultants are here to help. Contact us today to explore your cash credit options and secure the best deal for your business requirements.

FAQs

How is the cash credit limit determined?

The cash credit limit is determined based on the business’s working capital requirements, financial health, and collateral value. It is usually a percentage of the value of the collateral or the expected sales turnover.

What is the difference between cash credit and overdraft?

While both cash credit and overdraft provide short-term financing, cash credit is specifically designed for working capital needs and is secured against inventory or receivables. Overdraft is generally a temporary facility linked to a current account, allowing businesses to withdraw more than their account balance, usually without specific collateral.

Can cash credit be used for long-term investments?

No, cash credit is intended for short-term working capital needs and should not be used for long-term investments or capital expenditures.

How does repayment work for cash credit?

Repayment is flexible, and businesses can repay the utilized amount as and when funds are available. Interest is charged only on the utilized amount, and the outstanding balance can be cleared through deposits or incoming receivables.