Cash Credit

Cash credit is essentially a form of working capital loan that can be availed by the business entities. It is the credit that is allowed to the businesses over their current account balance for a period of time. Businesses can borrow amounts over and above their account balance up to the agreed or permissible borrowing limit. Interest will be charged by the bank as per its guidelines and agreed terms between the borrower and the lender only on the amounts withdrawn and not on the entire borrowing limit.

The borrowing limit allowed to the borrower is determined based on many factors like,

• Past track record
• Funds required by the borrower
• Repayment capacity of the borrower
• Current assets and current liabilities position of the business organization
• Collateral or security provided for the cash credit facility
• Credit profile of the borrower

Eligibility for Cash Credit Facility

Cash Credit facility is the credit offered to any person over the amount available in their account at a charge of interest on the funds borrowed. The eligible persons that can avail this facility are any of the following persons.

• Individuals
• Sole Proprietors/Professionals
• Partnership Firms
• Limited Liability Partnerships
• Registered Trusts,
• Private limited Companies
• Public Limited Companies
• Co-operative Societies

Documents required for Cash Credit facility

The documents required for availing this facility are majorly KYC documents as well as a few other documents that determine the nature and viability of the business. The list of documents is mentioned below.

• Application for Cash Credit Facility (duly filled and signed)
• PAN Card
• Identity Proof of the applicant
• Address proof of the applicant
• Recent photographs
• Bank statements (minimum 6 months)
• Financial Statements
• ITR and GST Returns
• Business proof 
• Business address proof
• Partnership Deed/ Memorandum and Articles of Association as the case may be
• Collateral/security details
• Existing loan/liability details
• GST Certificates

Features of Cash Credit Facility

The fact is that in today’s world, no organization can survive without extending credit to its debtors or vice versa. This many times leads to a cash crunch in the organization for immediate payments to be made or immediate working capital needs. Hence, the cash credit facility of great importance to the business organizations. Some of the highlights of this facility extended to the businesses are discussed below.

Nature and type of loan

Cash credit facility, as mentioned earlier, is in the nature of a short term loan that can be extended to the business organizations to meet their working capital needs. It can also be in the colour of the overdraft facility or a line of credit. It is a secured loan provided to the businesses. Being secured in nature, this type of loan can be processed faster and with more ease as compared to unsecured loans.

Tenure

Cash credit facility is sanctioned to a borrower for a period of 12 months or 1 year at a time. In certain cases, this tenure can also be determined on quarterly basis. This period is renewable upon completion, if needed, as per the agreed terms between the borrower and the lending bank.

Repayment schedule

The repayment schedule for cash credit facility is very flexible. Borrowers can repay this loan on EMI basis either as monthly payments or quarterly payments as agreed by both the parties. Businesses are expected to adhere to payment schedules in order to avail uninterrupted cash credit facility.

Interest

Cash credit facility is favourable as compared to the traditional business term loans as the interest charged on cash credit facility is not on the entire amount of the borrowing limit. It is charged only on the amount borrowed during the tenure of the loan.

Interest is calculated on the daily closing balance of the account.

Collateral

The bank usually needs collateral to extend this facility to the business organizations. The borrowing limit is usually determined to a percentage of the collateral provided. In most cases, collateral for a cash credit facility is taken to the inventory, current assets or fixed assets of the business. For non-manufacturing businesses, collateral can be any adequate asset as agreed between the borrower and the lender.

Bank charge

The banks charge a certain amount of fees or charges for providing this cash credit facility to the borrowers even if this facility is left unused during the tenure of the short term loan provided. This charge is for the funds that are blocked or reserved for the borrower for the cash credit facility extended by the bank which would have been otherwise invested elsewhere.

Limitless withdrawals during the tenure

The business entity is allowed limitless withdrawals during the tenure of the facility or this loan. However, the borrower should bear in mind that the borrowing limit allowed cannot be exceeded.

Benefits of Cash Credit Facility

Cash Credit facility is a real boon to the business organizations. Some of the benefits of this facility extended to the businesses are discussed below.

• Excellent source to meet working capital needs
• Easy access to funds or liquidity
• Faster processing due to this facility being in the nature of a secured loan.
• Renewable tenure
• Flexible repayment options 
• Reduced interest payment as interest is charged only on the amounts borrowed from the total limit extended
• Multiple withdrawals
• Tax benefits for the interest charged on such loans

Disadvantages of cash Credit Facility

Although considered to be a favourable and an easy source of finance to the borrowers, cash credit facilities do have certain disadvantages.

Some of these advantages are discussed below.

• Higher rate of interest as compared to traditional loan options
• It is considered to be a temporary source of finance and cannot be relied upon for long term purposes
• Renewal of cash credit facility each time after completion of 12 months can make it a cumbersome process and will require extensive paperwork each time.
• Since this facility is extended based on the past track record of the business organization, it becomes difficult for newer businesses to procure such facility.

Accounting Treatment of Cash Credit Facility

Cash credit facility is considered to be a short term loan. Therefore, as per the accounting rules and Accounting Standards governing the preparation of the books of accounts and the financial statements, cash credit has to be shown in the liabilities side of the Balance Sheet of the organization under the head Short Term Loans.

Cash Credit account has to be maintained separately and will always show a credit balance.

FAQs – Cash Credit