Cash Credit is a short-term funding or loan for a company to meet its working capital requirements. Cash credit has loan repayment tenure of one year. Bank offers loan to an enterprise depending on the credit history of the applicant. Funding procured from cash credit loan can be used for various business purposes, such as business expansion, buying real estate, plant and machinery, purchasing raw materials, enhancing stocks, hiring staff, paying-off salaries, undertaking trainings, debt consolidation, etc.
What is Cash Credit Loan?
Cash credit is a type of working capital loan in which money can be withdrawn against the hypothecation of stocks and receivables.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 secured loan or unsecured loan. The business is limited to borrow only up to the sanctioned limit from the lender. Business need to submit collateral or security to avail cash credit loan 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 Loan Procedure
The initial step is that bank or lender sanctions a limit to a business or enterprise and from the assigned limit, business 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 bank or lender depends on the creditworthiness and submitted collateral by the company.
Who can avail Cash Credit Loan?
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.
Interest Rate
The interest rate for availing Cash Credit loan varies from bank to bank that shall change from time to time and depends on the creditworthiness and financial history of the applicant.
Features
- Cash credit is a short-term loan with repayment period of 12 months
- Interest rate charged by lender is on the money withdrawn and not on the sanctioned credit limit
- Cash credit is always offered against collateral or security
- It is used to meet daily working requirements of business
- Higher limit can be availed by businesses with good credit history
- Credit limit is sanctioned considering the company’s turnover
- 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 loan is tax deductible
- Money can be withdrawn any number of times from the sanctioned limit
Leading banks offering Cash Credit Loan
Documents Required
- Duly filled application form
- Business plan
- PAN card
- Passport-sized photographs of the applicant
- Identity Proof: Passport, Driving License, Voter’s ID card
- Residence Proof: Voter’s ID card, Driving License, Passport, Ration Card, Telephone Bill
- Income Proof: Last 6 months’ bank statement and last 3 years’ audited financial documents
- Last 2 years’ ITR and current years’ GST returns
- Business Proof: Incorporation and sales tax registration certificates, rent agreement,
- Business address proof: Ownership proof, property papers, house tax document, electricity bill
- Details of collateral or security to be submitted
- Details of existing loans and their repayment schedule
- Partnership deed and Memorandum of Articles (MoA)
- Valid Trade Licenses
- Certificate under Shop Establishment Act
- GST registration certificate
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 lender sanctions the cash credit at ease, as the chances of its repayment capacity increases. The financial institution sets a pre-determined credit limit based on the previous year’s performance, current year’s estimated performance and projections of the next year. Businesses can reduce the interest rate burden by depositing money at regular intervals or whenever possible.
FAQs:
What is Cash Credit loan?
Cash credit loan is a credit limit sanctioned by banks based on turnover, stocks and receivables of a business unit.
What is the loan amount offered under Cash credit facility?
The loan amount offered by financial institutions depends on the volume of stocks and receivables possessed by a unit.
Do banks require collateral before sanctioning Cash Credit limit to applicant?
Yes, banks require collateral security of residential and commercial properties before sanctioning Cash Credit limit.
Where I can use money availed by Cash credit limit?
You can use the money to meet your working capital requirements and for business expansion purposes.
Who can avail cash credit loan?
All individuals, manufacturers, traders, retailers, distributors, companies, partnerships, sole proprietorship, LLPs, trusts, societies can apply for cash credit loan.