Cash Credit

Cash Credit is short-term funding or loan for a company to meet its working capital requirements. Bank offers loans to an enterprise depending on its credit history and financial stability. Funding procured from cash credit loans can be used for various business purposes, such as business expansion, buying plant and machinery, purchasing raw materials, enhancing stocks, hiring staff, paying-off salaries, undertaking training, debt consolidation, etc. Cash credit has a loan repayment tenure of a maximum of up to 12 months that can be renewed.

 

Cash credit is a type of working capital loan in which money can be withdrawn against the hypothecation of stocks and receivables. Cash credit instantly helps businesses in overcoming the cash crunch situation during business tenure. This working capital loan can be availed either in form of a secured loan or an unsecured loan. The business is limited to borrowing only up to the sanctioned limit from the lender. Businesses need to submit collateral or security to avail cash credit wherein the collateral to be submitted can be in the form of fixed assets, stock-in-trade, raw materials, finished goods, equipment, property, etc.

Cash Credit Interest Rate

The interest rate for availing Cash Credit loan varies from bank to bank which shall change from time to time and depends on the creditworthiness and financial history of the applicant.

Also Get: Business Loan Interest Rate List of All Banks and NBFCs

Features of Cash Credit

• Cash credit is a short-term loan with a repayment period of 12 months
• Interest rate charged by the lender is on the money withdrawn and not on the total sanctioned limit
• Money can be withdrawn any number of times from the sanctioned limit
• Cash credit is always offered against collateral or security
• Higher limits can be availed by businesses with good credit scores and repayment history
• Credit limit is sanctioned considering the company’s turnover and volume
• Cash credit can be repaid in form of monthly, quarterly, or half-yearly repayments
• Individual borrowers can also avail cash credit against their Fixed Deposits
• Lender has an option of recalling sanctioned amount at short notice
• Interest rate paid on cash credit is tax-deductible

How it Works

Cash credit permits an enterprise to withdraw money from a bank account. The money can be withdrawn a number of times until the total sanctioned limit is reached. The cash limit is defined by the lender as per the applicant’s profile, CIBIL score, and creditworthiness. These factors are based on the borrower’s company structure and its assets and liabilities.

Comparison of Business Loan Interest Rates offered by Top Banks/NBFCs – 2023

Bank/NBFCs	Interest Rate
Axis Bank	14.95% - 19.20% p.a.	Apply Now
Bajaj Finserv	9.75% - 30% p.a.	Apply Now
Flexiloans	1% per month onwards	Apply Now
HDB Financial Services Ltd.	Up to 36% p.a.	Apply Now
HDFC Bank	10% - 22.50% p.a.	Apply Now
IDFC First Bank	10.50% p.a. onwards	Apply Now
Indifi	1.50% per month onwards	Apply Now
Kotak Mahindra Bank	16% - 26% p.a.	Apply Now
Lendingkart	12% - 27% p.a.	Apply Now
Mcapital	2% per month onwards	Apply Now
NeoGrowth Finance	19% - 24% p.a.	Apply Now
Tata Capital	12% p.a. onwards	Apply Now
UGRO Capital	14.90% p.a.	Apply Now

Documents Required

• Duly filled application form with Passport-sized photographs
• Business PAN card
• KYC documents: Applicant’s Passport, Driving License, Voter’s ID card, PAN card, Aadhar card, Utility Bills (Water/ Electricity Bills)
• Income Proof: Last 6 months’ bank statement
• Business Incorporation Certificate
• Business address proof
• Ownership proof: Company’s deed
• Details of collateral or security to be submitted
• Any other document required by the lender

Procedure to avail Cash Credit

The initial step is that bank or lender sanctions a limit to a business or enterprise and from the assigned limit, businesses can withdraw money as per their requirements. However, the limit sanctioned by the lender depends on the current assets and liabilities of the business. Strong and financially sound establishments are sanctioned with higher limits, as compared to businesses with lesser finance or lower credit score. The interest rate charged by the bank or lender depends on the creditworthiness and submitted collateral by the company. Check your credit score to avail Cash credit at comparatively lower interest rates.

Also Read: How to Apply for Business Loan – Step by Step Procedure

Eligible Entities

Cash Credit Facility can be availed by Individuals, Professionals, Business Owners, Companies, Partnerships, Sole Proprietorships, Limited Liability Partnerships (LLPs), Co-operative Societies, and Registered Trusts engaged in manufacturing, trading, and services categorized under MSME.

Advantages and Disadvantages of Cash Credit

Pros	Cons
Amount can be withdrawn multiple time from the sanctioned limit	Rate of Interest is High
Interest Rate charged only on the withdrawn or utilized amount	Short-term Loan
No Credit score check is required	Lesser repayment period of 12 months
Interest paid is tax-deductible	Difficult to avail by Startups
Quick and easily accessible with flexibility	Used mainly to meet working capital requirements

Cash Credit offered by Leading Banks/NBFCs

Axis Bank	IDFC First Bank
Bajaj Finserv	J&K Bank
Bank of Baroda	Kotak Mahindra Bank
Canara Bank	Punjab National Bank
HDFC Bank	RBL Bank
ICICI Bank	Yes Bank
IDBI Bank

Availing cash credit loan becomes difficult, if due to market fluctuations the performance of the enterprise goes down during business tenure. However, if the business is doing well then the lender sanctions the cash credit at ease, as the chances of its repayment capacity increase. The financial institution sets a pre-determined credit limit based on the previous year’s performance, the current year’s estimated performance, and projections for the next year. Businesses can reduce the interest rate burden by depositing money at regular intervals or whenever possible.

FAQs

Q. What is the loan amount offered under the Cash credit facility?

Ans. The loan amount offered by financial institutions depends on the volume of stocks and receivables possessed by a unit.

Q. Do banks require collateral before sanctioning Cash Credit limits to applicants?

Ans. Yes, banks require collateral security of residential and commercial properties before sanctioning the Cash Credit limit.

Q. Where I can use money availed by Cash credit limit?

Ans. You can use the money to meet your working capital requirements and for business expansion purposes.

Q. Who can avail this facility?

Ans. All individuals, manufacturers, traders, retailers, distributors, companies, partnerships, sole proprietorships, LLPs, trusts, societies can apply for a cash credit loan.

Q. What is the difference between a business loan and cash credit?

Ans. Loan is a term loan offered by a financial institution at a defined interest rate to be repaid within specific tenure. Whereas, cash credit is a short-term working capital loan in the form of a credit limit offered by a bank to an enterprise.

Q. How is the loan limit calculated by banks?

Ans. The cash credit limit is calculated on the basis of the applicant’s profile, your relationship with the bank, financial stability of enterprise, repayment capability, and creditworthiness.