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    Cash Credit

    What is Cash Credit?

    Cash Credit (CC) is a short-term loan facility banks provide to businesses, financial institutions, and companies to meet their working capital needs. It allows organisations to withdraw funds even without a credit balance, up to a predefined borrowing limit set by the bank.

    Understanding Cash Credit

    • Purpose: Designed to finance the instant cash requirements of businesses, such as purchasing current assets or managing daily operations.
    • Loan Limit: Varies among commercial banks and is determined based on the business's creditworthiness and collateral.
    • Interest: Charged only on the amount utilised from the approved borrowing limit, calculated daily on the closing balance.
    • Repayment Tenure: Typically restricted to 12 months or less.

    Key Features of Cash Credit

    1. Short-Term Finance: Ideal for meeting temporary working capital requirements.
    2. Collateral Requirement: A secured loan where businesses need to pledge assets like inventory, receivables, or other movable assets.
    3. Borrowing Limit: Sanctioned by banks in advance based on business turnover, vintage, and creditworthiness.
    4. Loan Account: Requires creating a separate loan account, unlike overdrafts.
    5. Flexible Usage: Funds can be withdrawn as needed, thereby giving flexibility in the management of liquidity.
    6. Interest Charges: Applicable on the withdrawn amount, not on the total credit limit.

    Advantages of Cash Credit

    1. Flexibility: The businesses have the liberty of withdrawing funds as needed so that the liquidity can be dealt with properly and efficiently.
    2. Cost Efficiency: Only the used amount is charged on interest and the entire credit limit.
    3. Liquidity Management: Ensures that businesses have immediate access to cash when needed.
    4. Lower Interest Rates: Generally more affordable than overdraft facilities.
    5. Collateral-Based Security: Provides a sense of assurance to the bank, leading to better terms for borrowers.

    Limitations of Cash Credit

    1. Collateral Requirement: Cash credit is not suitable for firms that cannot pledge assets.
    2. Strict Evaluation: Cash credit requires detailed financial statement and strong creditworthiness.
    3. Commitment Charges: Some banks charge some fees for opening and maintaining the loan account.
    4. Short Tenure: Repayment is normally required within 12 months which is not suitable for long term requirements.

    Bottomline

    Cash credit is a vital financial instrument for businesses that are looking for short-term liquidity to manage working capital requirements. It is flexible and cost-efficient and ensures smooth business operations. However, companies need to evaluate repayment capabilities and understand the bank's terms before opting for cash credit.

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