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Cash credit loans are offered to companies against adequate security. These loans are extended to companies, they are used to fund working capital requirements. After acquisition of required security against the loan, the company’s bank account will be credited with funds. The company can withdraw money from the bank to the specified limit as indicated by the bank. The company typically uses this type of loan to run its day-to-day operations such as buying raw materials, paying salaries or wages, fixing repairs or overhaul of machinery etc. It can, however, be used for capital expenditure such as buying machinery, leasing of building etc. The cash credit account is like current account. The only difference is that current account allows overdraft facility occasionally, while cash credit allows overdrawing from the account on a continuous basis.
About Cash Credit Loan
Companies are constantly in need of funds to meet their monetary requirement. Banks provide funds to meet long term and short term needs of companies. Companies choose short term loan facility by availing cash credit and overdraft facility. Cash credit is an arrangement where the bank allows the company to withdraw funds over and above the credit that it holds in the account. However, the additional funds are provided as a loan against adequate collateral.
The difference between cash credit and overdraft are -
The key features and benefits of cash credit loans are –
Cash credit loans are availed by companies for working capital purposes. The day-to-day operations of the company are critical for supply chain management and inventory management. The funds so borrowed can be used for paying the supplier to procure raw material or for paying the storage area rent which could be charged daily, the funds can also be used to hire personnel on a temporary basis and are paid wages.
Cash credit loans are secured loans; the loan is provided against adequate security in the form of assets or stock. The collateral can be stock, assets or financial instruments of cash value higher than that of the loan. The loan quantum is generally a % of the cash value of the collateral.
These loans are used to meet short term requirement. Generally, these loans are used for working capital management, primarily because they are extended as an overdraft facility. Hence, the company can withdraw the funds as per requirement. The interest is chargeable for the funds withdrawn and for the period withdrawn. The funds are repayable as per EMI schedule can be monthly or quarterly. Irrespective of the financial situation of the company, the repayment must happen as per schedule.
There is a wide variety of instruments that qualify as collateral for these types of loans. Loan applicant can provide raw materials, finished goods or any other inventory as hypothecation. The loan value is always lower than the cash value of the collateral. In the event of default, the collateral is sold at prevalent market price and the loan is closed in full. Incase, the cash value of collateral falls below the loan value, the borrower is required to bring in additional collateral or sell off the underlying collateral and close the loan in full.
Interest is payable only on the amount utilized and not on the entire loan approved by the bank. This is one of the key benefits derived under this loan. Cash credit loans are offered as an overdraft. The funds are credited to the cash credit account, the borrower can withdraw funds as per requirement.
Any number of withdrawals are allowed against the cash credit account. The borrower may choose to withdraw funds daily to cater to working capital requirement. Operational aspects of the business require daily funding, cash credit loans align perfectly with this need. Fund withdrawal can be made by cheque issuance; cheques are issued by lender with the business entity’s name. Fund transfer can be conducted using internet and mobile banking facility.
Company and entity can also apply for cash credit against fixed deposits or any other financial instruments. For companies which do not manufacture goods, the collateral can be in any other form.
Cash credit loans are secured loans, hence, there is a need for furnishing security to avail the loan. The security can be submitted in the form of finished stock, work – in progress stock, stock-in-trade, spare parts, storage products etc. The value of the stock is evaluated and a % lower than the cash value of the products is extended as credit facility in the cash credit account. The hypothecated products cannot fall in value against the loan value. In case the cash value of the collateral inches closer to the loan value, the lender may request for additional collateral or sell off the collateral and close the loan in full.
Most nationalized banks offer cash credit loans to companies. Based on the collateral and history of credit the interest rates and other terms of the loan are negotiated. Some of the banks that offer cash credit loan and key features thereof are –
This is a unique financing option for businesses. They are called as working capital finance. The funds are available as cash credit limit or overdraft facility to meet day – to – day requirements. The finance can also be used to meet export requirements and can be used as a form of Letters of credit and buyers’ credit to ensure the goods are delivered as scheduled.
IDBI Bank offers working capital finance against raw materials, stores, fuel, paying the labor, power charges, storing goods etc. The loan is credited to the cash credit account which can be operated as current account and the drawings will be regulated within the permissible limits.
HDFC Bank offers commodity pledge loan and cash credit or overdraft facility with a view to cater to working capital requirement of the business. An assessment of the working capital requirement is made and the funds are disbursed accordingly. 3 years financial statement of the company has to be provided as part of documentation.
Cash credit loans are ideal for working capital requirements of a business. The cash credit loan operates like a current account which has overdraft facility. The borrower can withdraw funds as per requirement and pay interest only on the funds withdrawn.
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