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Cash Credit
Cash credit is a short-term loan or flexible credit facility provided by banks to businesses to cover their working capital needs, such as purchasing inventory or meeting operational expenses. Businesses can withdraw funds up to a pre-determined limit, repay them, and borrow again within that limit. It functions as a revolving fund, meaning interest is charged only on the amount utilized, not the entire sanctioned limit. Cash credit is typically secured by collateral like inventory or receivables and is designed to offer quick access to funds during temporary liquidity shortages. How it Works
- Sanctioned Limit: A bank approves a specific credit limit for the business based on its working capital requirements.
- Withdrawal: The business can withdraw funds up to this limit when needed, even if its current account balance is zero.
- Revolving Facility: The facility is revolving, allowing the business to repay and then re-borrow funds within the set limit.
- Interest: Interest is charged only on the actual amount of money withdrawn and used.
- Security: The facility is typically secured against the business's current assets, such as its inventory or receivables.
- Repayment: The business makes periodic payments to reduce the outstanding balance.
Key Features
- Short-Term Funding: It's a short-term solution to manage day-to-day expenses and shortfalls.
- Working Capital Focus: It is specifically designed to meet working capital requirements for ongoing business operations.
- Interest on Utilized Amount: Borrowers only pay interest on the amount they have borrowed, not the total credit limit.
- Collateral-Based: It requires collateral, such as inventory or other business assets, for security.
PurposeCash credit helps businesses maintain liquidity and avoid disruptions in operations by providing quick access to funds for: Purchasing raw materials or inventory, Meeting immediate operating expenses, and Covering unforeseen costs or liquidity shortages.
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