® 
Is your Credit Score >750?
- Get low interest loans & Lifetime FREE credit cards
- Get customized Credit Health Report
- Improve your creditworthiness
Get your FREE Credit Score & Report in just 2 minutes
About Cash Credit Loan
Cash credit loans are offered to companies against adequate security. These loans are extended to companies, they are used to fund working capital requirements. After acquisition of required security against the loan, the company’s bank account will be credited with funds. The company can withdraw money from the bank to the specified limit as indicated by the bank. The company typically uses this type of loan to run its day-to-day operations such as buying raw materials, paying salaries or wages, fixing repairs or overhaul of machinery etc. It can, however, be used for capital expenditure such as buying machinery, leasing of building etc. The cash credit account is like current account. The only difference is that current account allows overdraft facility occasionally, while cash credit allows overdrawing from the account on a continuous basis.
Understanding Cash Credit Loans
Companies are constantly in need of funds to meet their monetary requirement. Banks provide funds to meet long term and short term needs of companies. Companies choose short term loan facility by availing cash credit and overdraft facility. Cash credit is an arrangement where the bank allows the company to withdraw funds over and above the credit that it holds in the account. However, the additional funds are provided as a loan against adequate collateral.Difference between cash credit and overdraft
The difference between cash credit and overdraft are -
| Point of difference | Cash credit | Overdraft |
|---|---|---|
| Definition | It is a short-term loan used specifically for working capital requirement. Loan is provided against adequate collateral | Overdraft facility allows companies to withdraw more than the credit balance available in their respective accounts only upto a certain limit |
| Collateral | Inventory or assets are pledged | May or may not have collateral – financial assets or physical assets may be pledged |
| Name of account | Cash credit account | Current account |
Features of Cash Credit Loans
The key features and benefits of cash credit loans are –
- Purpose of the loan :
Cash credit loans are availed by companies for working capital purposes. The day-to-day operations of the company are critical for supply chain management and inventory management. The funds so borrowed can be used for paying the supplier to procure raw material or for paying the storage area rent which could be charged daily, the funds can also be used to hire personnel on a temporary basis and are paid wages.
- Type of loan :
Cash credit loans are secured loans; the loan is provided against adequate security in the form of assets or stock. The collateral can be stock, assets or financial instruments of cash value higher than that of the loan. The loan quantum is generally a % of the cash value of the collateral.
- Short-term loan with an EMI schedule :
These loans are used to meet short term requirement. Generally, these loans are used for working capital management, primarily because they are extended as an overdraft facility. Hence, the company can withdraw the funds as per requirement. The interest is chargeable for the funds withdrawn and for the period withdrawn. The funds are repayable as per EMI schedule can be monthly or quarterly. Irrespective of the financial situation of the company, the repayment must happen as per schedule.
- Collateral :
There is a wide variety of instruments that qualify as collateral for these types of loans. Loan applicant can provide raw materials, finished goods or any other inventory as hypothecation. The loan value is always lower than the cash value of the collateral. In the event of default, the collateral is sold at prevalent market price and the loan is closed in full. Incase, the cash value of collateral falls below the loan value, the borrower is required to bring in additional collateral or sell off the underlying collateral and close the loan in full.
- Interest payment is flexible :
Interest is payable only on the amount utilized and not on the entire loan approved by the bank. This is one of the key benefits derived under this loan. Cash credit loans are offered as an overdraft. The funds are credited to the cash credit account, the borrower can withdraw funds as per requirement.
- No restriction on number of withdrawals :
Any number of withdrawals are allowed against the cash credit account. The borrower may choose to withdraw funds daily to cater to working capital requirement. Operational aspects of the business require daily funding, cash credit loans align perfectly with this need. Fund withdrawal can be made by cheque issuance; cheques are issued by lender with the business entity’s name. Fund transfer can be conducted using internet and mobile banking facility.
- Other types of collateral :
Company and entity can also apply for cash credit against fixed deposits or any other financial instruments. For companies which do not manufacture goods, the collateral can be in any other form.
Collateral for Cash Credit Loans
Cash credit loans are secured loans, hence, there is a need for furnishing security to avail the loan. The security can be submitted in the form of finished stock, work – in progress stock, stock-in-trade, spare parts, storage products etc. The value of the stock is evaluated and a % lower than the cash value of the products is extended as credit facility in the cash credit account. The hypothecated products cannot fall in value against the loan value. In case the cash value of the collateral inches closer to the loan value, the lender may request for additional collateral or sell off the collateral and close the loan in full.
Benefits of availing Cash Credit Loans
- Working capital requirements can be met conveniently
- Provides for bank guarantees to meet performance and financial obligations
- Interest has to be paid only on the funds withdrawn and for the period utilized
- Processing and sanction are convenient and easy, since, this is a secured loan
- Cash credit loans can be extended either as an overdraft facility or as a term loan
- Terms are negotiable between the lender and borrower
- Favorable interest rates can be negotiated if the credit history of the promoters or company (applicant) is high
- Flexible repayment schedule can be either monthly or quarterly
Banks offering Cash Credit Loans
Most nationalized banks offer cash credit loans to companies. Based on the collateral and history of credit the interest rates and other terms of the loan are negotiated. Some of the banks that offer cash credit loan and key features thereof are –
- ICICI Bank Cash Credit Loan
- IDBI Bank Cash Credit Loan
- HDFC Bank Cash Credit Loan
This is a unique financing option for businesses. They are called as working capital finance. The funds are available as cash credit limit or overdraft facility to meet day – to – day requirements. The finance can also be used to meet export requirements and can be used as a form of Letters of credit and buyers’ credit to ensure the goods are delivered as scheduled.
IDBI Bank offers working capital finance against raw materials, stores, fuel, paying the labor, power charges, storing goods etc. The loan is credited to the cash credit account which can be operated as current account and the drawings will be regulated within the permissible limits.
HDFC Bank offers commodity pledge loan and cash credit or overdraft facility with a view to cater to working capital requirement of the business. An assessment of the working capital requirement is made and the funds are disbursed accordingly. 3 years financial statement of the company has to be provided as part of documentation.
Cash credit loans are ideal for working capital requirements of a business. The cash credit loan operates like a current account which has overdraft facility. The borrower can withdraw funds as per requirement and pay interest only on the funds withdrawn.
FAQs of Cash Credit loan
1. What is a cash credit loan?
Cash credit loan is a secured business loan. It is offered for a period of one year to business entities to meet their working capital requirements. It is a short-term loan offered as a credit limit in your bank account. The funds can be withdrawn as and when required.
2. What are the purposes against which I can use a cash credit loan?
A cash credit loan is provided to fund the working capital needs of a business. The operational expenses like purchase of raw materials, maintenance of stock, and administrative expenses like payment of salaries, and rent are all covered.
3. How is the eligibility for a cash credit loan assessed?
- Business must be in existence at least for 1 year. Some lenders require a minimum business continuity of 3 years.
- Cash credit loans are provided mostly to manufacturers and traders.
- Cash credit loans are provided as a limit which is called a drawing power (DP). It is usually given as a specific percentage of your sales or turnover and stock.
- Your credit score, repayment history, and business health are also considered while granting a cash credit loan.
4. What are the collaterals that can be offered for a cash credit loan?
The borrower can provide raw materials, inventory, and finished products as collateral for a cash credit loan. If the value of the loan is high, some banks may even require hypothecation of plant and machinery. The value of the loan is always lower than the value of the security. In case the borrower defaults in payment, the banks sell the collaterals at the prevalent market price and close the loan.
5. How many times can I withdraw from a cash credit loan?
There is no restriction on the number of times a cash credit account can be withdrawn provided that you withdraw within your drawing power.
6. What is drawing power?
Drawing power is the limit up to which a borrower of a cash credit loan can withdraw from his account. It is reviewed on a monthly or quarterly basis by the banks depending upon the risk profile of the borrower and transactions in the cash credit account. The borrower must submit monthly or quarterly stock statements, and book debts statements to the bank. Drawing power is calculated as Stock less creditors plus debtors where a margin is deducted and granted as DP.
7. How must a cash credit loan be repaid?
There is no fixed monthly commitment to repay a cash credit loan. There must be credits to the account. It can be repaid daily, weekly or monthly as agreed with the lender. The cash credit limit must not be overdrawn. Any overdrawn amount shall be repaid immediately otherwise penal interest will be charged as applicable.
8. What are the charges applicable to a cash credit loan?
The loan processing fees are charged by the banks for undertaking various due diligence like inspection of business premises, valuation of stock, property, etc., It normally ranges from 1% to 3% of the sanctioned limit and can also be a fixed amount. Most banks do not levy foreclosure charges to encourage repayments by the lender. However, foreclosure charges can be around 0.5% to 2% of the sanctioned limit.
9. How is a cash credit loan different from an overdraft?
A cash credit loan is provided based on current assets as collateral whereas an overdraft is based on credit score and investments available with the borrower. The term of cash credit is generally one year and for an overdraft, it is even shorter as a month, quarter, or half year but does not exceed one year. The overdraft is issued on the existing account of a borrower and for a cash credit loan, a new account must be opened.
Write a review