Cash Credit: Definition & Advantages of Cash Credit | What is Cash Credit?

What is Cash Credit?

Cash credit is a short-term source of funding approved by banks for its clients to meet their working capital requirements. With cash credit, the bank allows its clients to accept a loan up to a predetermined amount. 

Cash Credits are loans given to businesses to cover their working capital needs. Businesses that are short on cash find it challenging to continue their daily activities, which leads to either large debts or, in the worst case, liquidation. To help them meet their liquidity demands, banks and other lending institutions provide a variety of short- and long-term loans and financing (cash credit) options.

Principal Elements of Cash Credit

1. Type and Purpose of the Loan: As was already said, a cash credit facility is a short-term loan provided to businesses to meet their working capital needs.

2. Duration: A borrower is given access to a cash credit facility for an entire year. The terms set forth by the borrower and the lending bank may extend this time frame.

3. Payback Timeline: A cash credit facility's payback schedule is quite flexible. The borrower may repay this loan over time through EMIs, which may be agreed upon monthly or quarterly.

4. Interest Assessed is only applied to the total amount borrowed over the loan tenure. Interest is calculated based on the account's daily closing balance.

5. Collateral Requirement: The bank often requires collateral before providing a business with this financing.

6. Charges at the Bank: The banks charge the borrowers a fee or charge for supplying them with the cash credit facility even if they do not utilise it throughout the loan.

The Operation of Cash Credit

Cash credit facility is a particular kind of short-term loan facility. As a result, by the accounting principles and standards governing the creation of the books of accounts and financial statements, cash credit must appear on the balance sheet heading “Short Term Loans” under the “liability” section.

Qualification for a Cash Credit Facility

Cash credit is credit given to a person over what is in their account, with interest added to the money borrowed. You can use this service if you fit any of the following criteria.

1. Individuals, Limited Liability Partnerships

2. Licensed or Registered Trusts

3. Co-operative Societies, Public Limited Companies

      4.   Partnership Companies

Required Documents for a Cash Credit Facility

To use this service, you must have the KYC paperwork and a few other records that reveal the nature and longevity of the applicant. The documents are listed below.

1. Identity PAN Card Evidence of the applicant's address Evidence of the applicant's most recent photos

2. Banking Records

3. Financial Statements Application Form

4. GST and Income Tax Returns

5. Commercial proof Commercial address proof

6. Partnership Deed, Articles of Association, and Memorandum (if applicable)

7. Security information or collateral

8. Information about current loans and liabilities GST Certificates

A Cash Credit Facility's advantages

1. An excellent way to fulfill your need for working capital.

2. This facility allows for simple access to cash or liquidity because it functions similarly to a secured loan.

3. Additionally, it enables quicker processing.

4. Perpetual term

5. Flexible options for repayment

6. Lower interest costs since only the sums borrowed from the enlarged total are charged to interest.

7. Several withdrawals

8. These loans' interest is tax deductible.

What Determines Cash Credit Factors?

Several factors determine the borrower's borrowing limit:

1. The borrower's prior performance

2. The money that the borrower has asked for

3. The borrower's capacity to repay

4. The Business Organization's Current Assets and Current Liabilities

5. The security or collateral is used to protect the cash credit facility.

6. The credit history of the borrower