What is Cash Credit ?

A Cash Credit (CC) is a short-term source of financing for a company. In other words, a cash credit is a short-term loan extended to a company by a bank. It allows a company to withdraw money from a bank account without keeping a credit balance but is only limited to borrow up to the borrowing limit. Also, the interest is charged on the amount borrowed and not the borrowing limit.

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Important Features of Cash Credit

Borrowing limit

A cash credit comes with a borrowing limit determined by the drawing power of the borrower. A company can withdraw funds up to the borrowing limit.

Interest on running balance

In contrast with other traditional debt financing methods such as loans, the interest charged is only on the running balance of the cash credit account and not on the borrowing limit.

Minimum commitment charge

The short-term loan comes with a minimum charge from the loan amount regardless of whether the borrower is able to utilize it. For example, banks typically include a clause that requires the borrower to pay a minimum interest on a predetermined amount or the amount withdrawn, whichever is higher.

Collateral security

It is secured against a security such as stock, debtors, etc. and/or fixed assets and properties as collateral security.

 

 

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Credit period

It is typically given for a maximum period of 12 months, after which the drawing power is re-evaluated.

Example of Cash Credit

Company A is a phone manufacturer and operates a factory where the company invests money to purchase raw materials to convert them into finished goods. However, the products in finished goods inventory are not immediately sold – the company’s capital is stuck in the form of inventories. In addition to the capital getting stuck in inventories, the company must also meet its daily business expenses. In order for Company A to meet its expenses and wait for their finished goods inventory to convert into cash, the company takes a cash credit loan to successfully run their business without a shortfall.

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Advantages of Cash Credit

All loans are not created equal, Cash Credit  has become a great option for people to use.

Source of working capital financing

A cash credit is an important source of working capital financing as the company need worry about liquidity issues.

Easy arrangement

It can be easily arranged by a bank provided that collateral security is available to be pledged and the realizable value is easily determined.

Flexibility

Withdrawals on a cash credit can be made as many times up to the borrowing limit and deposits of excess cash into the account lowers the burden of interest that a company faces.

Tax-deductible

Interest payments made are tax-deductible and thus reduces the overall tax burden on the company.

 

Interest charged

A cash credit reduces the financing cost of the borrower as the interest charged is only on the utilized amount or minimum commitment charge.

Documents Required For Applying to Bank for Cash Credit

ID proof : Pan card/ Passport/c Driving License

Signature Proof : Pan card/ Passport/Driving License

Age Proof : Pan card/ Passport/Driving License/DOB Certificate

Residence Proof : Passport/ Voter Card/Driving License/Ration Card/ Telephone Bill.

Office Proof : Telephone Bill/ Sales Tax registration certificate/ Electricity Bill

Ownership Proof : Electricity Bill/house tax/property papers Income Proof : last 3 years audited financial along with audit report with all

Bank statement : main account last 6 month. Sanction letter of existing Cash credit or overdraft limit availed by the company.

Collateral Security : Property papers which are offered.

Constitution proof : MOA &  AOA /  partnership deed .

Others : any Govt. registration like service tax, sales Tax, excise,

Loan Proof : Repayment Schedule of all running loans

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