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About Cash Credit Loan

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.

Cash Credit Loan
Cash Credit Loan

Understanding Cash Credit Loans

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.

Difference between cash credit and overdraft

The difference between cash credit and overdraft are -

Point of differenceCash creditOverdraft
DefinitionIt is a short-term loan used specifically for working capital requirement. Loan is provided against adequate collateralOverdraft facility allows companies to withdraw more than the credit balance available in their respective accounts only upto a certain limit
CollateralInventory or assets are pledgedMay or may not have collateral – financial assets or physical assets may be pledged
Name of accountCash credit accountCurrent account

Features of Cash Credit Loans

The key features and benefits of cash credit loans are –

  • Purpose of the loan :

    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.

  • Type of loan :

    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.

  • Short-term loan with an EMI schedule :

    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.

  • Collateral :

    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 payment is flexible :

    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.

  • No restriction on number of withdrawals :

    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.

  • Other types of collateral :

    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.

Collateral for Cash Credit Loans

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.

Benefits of availing Cash Credit Loans

  • Working capital requirements can be met conveniently
  • Provides for bank guarantees to meet performance and financial obligations
  • Interest has to be paid only on the funds withdrawn and for the period utilized
  • Processing and sanction are convenient and easy, since, this is a secured loan
  • Cash credit loans can be extended either as an overdraft facility or as a term loan
  • Terms are negotiable between the lender and borrower
  • Favorable interest rates can be negotiated if the credit history of the promoters or company (applicant) is high
  • Flexible repayment schedule can be either monthly or quarterly

Banks offering Cash Credit Loans

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 –

  • ICICI Bank Cash Credit Loan
  • 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 Cash Credit Loan
  • 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 Cash Credit Loan
  • 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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