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Cash Credit - Meaning, Importance & Benefits for Businesses

Published On May/14/2024

When you own a business, staying on top of your capital needs is crucial. Capital is the lifeblood of any business, and without enough of it, your growth can hit a wall. To keep things running smoothly, sometimes you need to look outside your own resources for financial help. One popular option for getting the extra funds you need is cash credit.

Think of it as a short-term loan that allows you to withdraw money from your bank account beyond what you have in it. It's like having a financial safety net that you can tap into whenever your business faces cash flow issues. Read this blog to understand what is cash credit and how it can help your business.

What is Cash Credit and how business can benefit from it?

Cash credit is a form of short-term funding or loan provided to businesses to help them meet their working capital requirements. Financial institutions, such as banks, offer cash credit to companies based on their credit history and financial stability.

So, how does it work? When you secure funds through cash credit, you can use them for a variety of business-related needs. Whether it's expanding your operations, purchasing new plants and machinery, buying raw materials, hiring staff, or consolidating debt, cash credit provides the financial flexibility you need.

To avail of a working capital loan like cash credit, you need to offer your stocks and receivables as security against the loan. You can usually repay the loan amount over a period of up to 12 months, and this term can often be renewed. However, you can only borrow up to the limit sanctioned by the lender. Additionally, you'll need to submit collateral or security to qualify for cash credit.

Also Read: Working Capital: Meaning, Importance & Advantages

Once you have access to the funds, they can immediately help you manage any cash flow issues in your business activities. Cash credit acts as a financial buffer, ensuring that you can continue your operations smoothly, even during times of financial strain.

What are the features of Cash credit?

To understand cash credit further let’s know the features in detail.

Short-Term Loan:

Cash credit is a short-term loan facility with a repayment period of up to 12 months. This short-term nature makes it ideal for meeting immediate and recurring financial needs within a business cycle.

Interest on Withdrawn Amount:

Interest is charged only on the amount actually withdrawn from the sanctioned limit, not on the entire approved credit limit. This feature helps in reducing the overall interest burden on the business, making it a cost-effective borrowing option.

Flexible Withdrawals:

Businesses can withdraw funds multiple times as needed, provided they stay within the sanctioned credit limit. This flexibility allows businesses to manage cash flow more effectively, addressing financial requirements as they arise.

Collateral Requirement:

To secure a cash credit facility, businesses must provide collateral or security. This typically includes hypothecating assets like stocks and receivables, and sometimes additional collateral such as property or equipment.

Higher Limits for Better Credit Scores:

Businesses with higher credit scores and strong repayment histories are eligible for higher cash credit limits. This means a business must maintain good financial discipline and creditworthiness.

Turnover and Volume Consideration:

Banks and financial institutions assess the business’s turnover and volume when determining the sanctioned limit. Higher turnover and volume can lead to higher credit limits, reflecting the business’s capacity to generate revenue.

Flexible Repayment Options:

Borrowers can choose to repay the borrowed amount through various repayment schedules, including monthly, quarterly, or half-yearly instalments. This flexibility allows businesses to align repayments with their cash flow patterns.

Cash Credit Against Fixed Deposits:

Individual borrowers can avail of cash credit against their Fixed Deposits. This provides a convenient borrowing option for individuals who have substantial savings in Fixed Deposits but need immediate liquidity.

Recall on Short Notice:

The lender reserves the right to recall the sanctioned amount on short notice. This feature ensures that the lender can manage their risk exposure effectively, although it requires the borrower to be prepared for such eventualities.

Tax-Deductible Interest:

The interest paid on cash credit is tax-deductible, providing a financial benefit to the business. This tax advantage can lead to significant savings, reducing the overall cost of borrowing.

Now that you understand what a cash credit is you can always apply for one for smooth functioning of your business. You can also explore the different loans offered by Aditya Birla Financial Limited to scale your business and meet any financial requirements.