A business or a commercial concern requires funding in many ways to be able to offer a particular service or produce a particular product for its customers. They could range from finance required to fund purchases like machinery or real estate or cash required to tide over day-to-day running of the business like paying of salaries, etc. 

Why is Working Capital Loan Needed for a Business?

Running of any business involves a chain of activities right from production to sales and receipts in broad terms. There is a requirement of cash for running all these activities. Ideally, the receipts from sales should finance the next round of production and its associated activities. But in real world, a business concern may end up giving credit to its customer, and may not have time to wait for receipts, etc. 

Therefore, a business needs cash for running its day-to-day activities which could include payment of salaries, rent, monthly interest payments on debt availed, cost incurred in storing finished good, purchase of raw materials and many more. Working Capital loans are aimed at helping businesses meet this requirement of cash. These loans could be secured or unsecured.

What are the Types Of Working Capital Loans Available?

According to the business need, working capital loans may come in various forms like:

  • Trade Credit

  • Cash Credit

  • Purchase or Discounting of Bills

  • Letter of Credit

  • Bank Guarantee

  • Factoring

  • Commercial Papers

  • Public Deposits

Additional Reading: 10 things that bank ask when you need a business loan

What is a Cash Credit Loan?

A cash credit loan is a short-term source of finance, and has a tenure of up to one year. It is categorized under the Working Capital Loan. Under the short-term finance option, the bank offers its applicant to take a loan up to a certain limit depending on their credit history. 

This allows the customer, typically a business or company with a proven track record of profit, to withdraw money which is more than the balance available in their accounts. Cash credit loan is also known as Bank Overdraft facility.  

How does a Cash Credit Loan Work?

Cash Credit Loan can be liked to a line of credit too. In cash credit loan, the lender sanctions a limit to the business. The amount sanctioned depends upon the need of the funds, the existing current assets and current liabilities of the business, creditworthiness, repayment capacity, etc.

Within the sanctioned limit, the business can withdraw any amount as per its requirement. The withdrawals are regulated and the withdrawal limit is arrived at based on the structure of current assets and liability The bank, however, has the right to recall the amount at any time which the borrower is under obligation to return immediately. 

The amount withdrawn under the cash credit loan is charged a rate of interest which is again decided based on the collateral offered, creditworthiness, etc.

Security

Cash credit loan is granted against hypothecation of stock and assets such as raw materials, work-in-process, finished goods and stock-in-trade, including stores and spares.

Features of Cash Credit Loan

  • Cash credit loan is given to meet the working capital requirements of a business

  • It is given against a collateral security.

  • Interest is generally charged only on the amount of loan taken by the customer and not on the amount of credit sanctioned

  • Cash credit loan is a short-term loan with specified monthly/quarterly repayment structure as decided by the lender

  • The applicant is allowed to withdraw the funds made available to him to meet the day-to-day working capital requirement by way of a running account

  • A cheque book is issued in the name of the company and they can withdraw funds as per the requirement 

  • The applicant has the option to repay the loan as frequently as desired (daily/weekly), or as per the repayment structure is drawn by the lender

  • Even individual applicants can avail this type of facility against their fixed deposits (as a loan) and save on interest

  

Advantages of a Cash Credit Loan

 Disadvantages of a Cash Credit Loan

Ease of withdrawing only the amount as and when needed

 Though interest is charged only on the amount that is utilized, the borrower would need to pay a fee for the facility that is made available

It can be withdrawn any number of times within the given limit

 As it is considered as a business loan, extensive paperwork is required

Interest is charged only on the amount withdrawn

 If a bigger amount is obtained as a sanctioned amount, the business will need to pay a higher fee for the facility

Quicker way of dealing with working capital shortages

 The amount may be recalled at short notice. (This happens only when the repayments are not regular)

 

What are the Documents Required For a Cash Credit Loan?

  • Photograph of the main applicants (Founders, etc)

  • ID proof of the person representing the business: Pan card/ Passport/Driving License

  • PAN card 

  • 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 of the Business: 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/ details of other collateral which is offered

  • Constitution proof: MOA/ partnership deed of the business

  • Others: Any Govt. registration like GST number, excise details, etc

  • Loan Proof: Repayment Schedule of all running loans