Introduction to Cash Credit
Cash Credit is a short term loan approved by banks for businesses, financial institutions and companies to meet their working capital requirements. The borrowing company can take money, even without a credit balance, upto whatever borrowing limit exists.
Understanding Cash Credit
Cash Credit (CC) is a source of short term finance for businesses and companies. Cash credits are also called working capital loans as they fund the instant cash requirements of the organizations, or to purchase current assets. Borrowing limits on the amount of cash available for credit for the company varies between commercial banks. The interest charged is on the daily closing balance instead of the upper borrowing limit, so the repayment is only on the amount spent from the available limit. Because it is taken for a short term, the repayment of the amount taken on credit is also set at 12 or less months. Cash credit is a loan and banks demand collateral to approve it. Cash credits are similar to overdraft facilities, though there are significant differences between them. Cash credit is available for a shorter period of time and at a significantly less interest rate than overdrafts. Cash credit is used by financial institutions and businesses and with a collateral, which thus becomes a loan, overdraft is approved on the basis of the relationship that the bank and customer share.
Highlights of Cash Credit
Cash credit is a part of the Line of Credit that is allowed for individuals and institutions by banks to draw money from the fund facility whenever required. Cash credit is a secured form of line of credit due to the demand of collateral by the bank. Business vintage, i.e. the amount of years the business has been in existence and operation at the time of borrowing the cash credit, becomes a requirement. Where overdraft evaluates the creditworthiness of the borrower individually, the bank evaluates creditworthiness of the business through its past financial statements to provide cash credit. Overdrafts are possible to avail from an existing account, but cash credit can only be provided after creating a loan account with commitment charges.
