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Understanding The Importance of Cash Credit Loan in India

Typically, cash credit loans have a one-year tenure and offer short-term financing. A working capital loan is a type of cash credit loan. Banks offer short-term loans based on a person’s credit history up to a specific limit as part of the short-term finance option. 

An advantage of a cash credit loan is that a customer can withdraw more money than they have in their account, usually a business or company with a track record of profit. Overdraft facilities are also call as cash credit loans that may be use as sources of business finance.  

How does a Cash Credit Loan Work?

A Cash Credit Loan can be compare to a line of credit. A sanctione limit is impose on the business with this type of loan. In addition, the creditworthiness and repayment capacity of the business determine the amount sanction.

An organization may withdraw any amount within the sanctioned limit according to its needs. The withdrawal limit is determine as part of the current asset and liability structure. 

However, the borrower must return the balance immediately if the bank recalls the amount. Cash credit loans charge an interest rate that is determine by the available collateral , creditworthiness, etc., in addition to the amount withdraw.

Interest on running balance

The interest charged on cash credit accounts does not vary with the total borrowing limit. One usually only sees this as the other debt financing instruments used traditionally. The interest here is not charge on the sanction amount as it is with other types of debt-finance products provide by the bank, such as loans. 

Getting the money as soon as possible from the debtors and putting it in the current account is an incredible motivation for the borrower. 

Credit period

The drawing power is re-evaluate after 12 months, which is the typical period for which cash credit is given.

The charge for commitment is minimum.

If the borrower uses the available credit, he or she will have to pay a minimum charge for establishing the loan account. A standard clause in a bank loan is that the borrower must pay a minimum interest rate on either the withdrawn amount or the predetermined interest rate.

Collateral security

Securities, fix assets, or property are often used as collateral for loans.

Borrowing limit

The amount a borrower can borrow is determined by their creditworthiness when they apply for a cash advance or as sources of business finance. Ultimately, a company can borrow an amount the company deems reasonable. The maximum amount of borrowing stated by the bank constitutes the borrowing limit in the cash credit facility. 

As long as the borrower does not exhaust this limit, the borrower may withdraw and deposit funds as many times as he wants. It is determine by the bank’s understanding of the borrower’s borrowing power. Drawing power is determine by reviewing book debts, inventories, creditors, etc.

Benefits of cash credit loans 

  • Deductible from taxes

Companies are taxed on interest payments, thereby reducing their overall tax burden. 

  • Working capital sources

As the company doesn’t have to worry about liquidity issues, cash credit is an essential source of working capital funding.

  • Charged interest

Cash credit loans lower the costs incurred by the borrower. This is because the interest chargeable is assess only on the utilize amount. 

  • Flexibility

A cash credit account allows withdrawals many times, up to the borrowing limit, and excess cash deposits reduce an organization’s interest burden.

  • Easy arrangement

If collateral security is available and its realizable value can be readily determine, it can be easily arrange by a bank.

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