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Cash Credit Loan: Procedure, Eligibility and Advantages

Cash Credit Loan: Procedure, Eligibility and Advantages

Written by Roopya

A cash credit loan is a financial scheme that has been introduced to help businesses meet their capital requirements. If you are a business owner looking to build capital, these loans can let you achieve your objective. A lender approves and fixes the cash credit limit for businesses based on various factors, which will be discussed as we proceed.

What is a Cash Credit Loan?

cash credit loan

Cash credit loans are loan amount offered to businesses by financial entities. They use it to build their capital and obtain the required resources to strengthen their market position. Thus, it is also known as a working capital loan. The cash credit facility acts as a source of finance to be repaid within a short term of up to 12 months.

You can use the amount from this loan account to purchase machinery, equipment, tools, raw materials, etc. to produce finished products. The best part of this loan facility is that it can be renewed every time the previous loan repayment completes.

How Does it Work?

To understand cash credit meaning, it is important to understand how does it work.

With the help of cash credit loans, businesses get an opportunity to borrow money from their bank account irrespective of the balance they have. A lender or financial institution allows loan amount over and above their account balance. The loan seeker can acquire these loans as many times as they want but to a pre-defined borrowing limit. The interest rate, in the process, is charged only on the borrowed amount and not on the borrowing limit of the cash credit account holder has.

The cash credit limit, however, is fixed by financial institutions based on various factors, including:

  • Past track record
  • Collateral/ security against the loan
  • Borrower’s repayment capacity
  • Amount required
  • Organization’s current assets
  • Organization’s current liabilities

Once the above parameters are assessed properly, the cash credit limit is determined. Depending on the limit, however, you can obtain the loan in your cash credit account and use the same for to build and buy your working capital and resources. Some of these include – paying for business expansion, raw materials, labor wages, power charges, goods’ storage, financing the sales and other initiatives and campaigns, etc.

Eligibility Criteria

To be eligible to acquire a cash credit loan, however, you must fulfill certain criteria, which have been mentioned below:

  • Borrowers should be 25 years in age or above [The criteria might vary from lender to lender.]
  • Your business must be operational for at least 3 years to act as a guarantee or collateral security.
  • You should have filed IT returns for at least a year. [This requirement may or may not be there. It will depend on the lender you choose for obtaining cash credit.]
  • Some lending institutions keep the types of companies for the cash credit limits restricted. The types they mostly allow loans include proprietorship firms, limited liability companies, publicly traded companies, partnership firms, etc.
  • Borrowers must have a collateral/security to offer to financial institution to act as a guarantee against the cash credit loans acquired.

Documents Required

As soon as you find yourself eligible for the credit balance, here are the documents that you will be required to keep ready to apply for the loan:

  • Identity proof like voter’s ID card, etc.
  • Business ownership proof
  • CA certified financial statements
  • IT returns filing document for at least a year
  • Proof of collateral/security offered
  • Loan repayment credentials, if applicable
  • Bank account statements for a minimum of six months
  • Other documents as asked for by the lending institution

Checklist – Things to Remember

Before you apply for and start utilizing the features of cash credit facility, there are a few things that you need to remember. Once you think you are convinced, proceed further:

  • The interest rate for a cash credit loan is determined based on the value of the collateral. If the collateral value is more, borrowers can negotiate on the interest rate being offered for the loan amount.
  • There may be restrictions on the kind of collateral the lending institution accepts. Thus, be aware of the security type you have to offer and whether your lender accepts the same.
  • The lenders have running credit facility for businesses. This feature helps borrowers withdraw money for their working capital as and when they require. However, to enjoy this facility, you must have a good repayment track.
  • The lending institutions might impose restrictions on how businesses should use the cash credit loan. They might allow you to spend on working capital or resources, but they might not allow you to use the same for making long-term investments. In short, they keep an eye on how borrowers use the cash credit facility.

How to Apply? The Process

Once you find yourself eligible to apply for the cash credit loan facility, you can submit your duly filled application form for further approval. If the lending institution knows that your business is capable of paying back the amount in the specified tenure, it will surely approve the loan. It will check the collateral and evaluate it to determine the interest rate.

Once the interest rate is decided and the credit limit is decided, the lenders will let you know to know if you are fine with it. As soon as you give green signal, the cash credit loan application is approved for you to have the amount in your account for further business use.

Features of Cash Credit Loans

These loan types have numerous features that make them a feasible option for businesses. Some of them are as follows:

  • Purpose-specific business loan, helping businesses to build working capital.
  • Decided on the credit limit based on the creditworthiness of borrowers
  • The cash credit loan amount can be withdrawn whenever required.
  • It is a collateral-based business loan. It is secured by company stocks and assets.
  • Interest is charged on the loan amount and not on the borrowing limit
  • Repayment to be done by up to 12 months
  • It is a short-term financing to be either paid daily, weekly, monthly or quarterly as decided by lenders.
  • The lending institution provides a checkbook for regular withdrawal details.

Benefits

When you acquire a cash credit business loan for your business, you are likely to receive the following benefits:

  • The cash credit loan option is available to businesses that want to make liquidating assets easier.
  • With cash credit facility, borrowers have significant drawing power. Thus, they can withdraw money as and when required.
  • Interest payments are tax-decutible. Thus, you will have no tax burden.
  • You pay interest only for the borrowed funds.
  • You are free for depositing money whenever you have access to funds.

Limitations

Well, when you have advantage to enjoy with cash credit options, you also have disadvantages that limit your rights. Some of them have been listed below:

  • No extended period granted for repayment
  • The cash credit facility can be renewed post-expiration, but the terms and conditions might not remain same.
  • Obtaining loan can be difficult as verification and approval processed are stricter.
  • The interest charged is higher.
  • Borrowers are subject to payment of minimum commitment charge.

Cash Credit vs Overdraft

Cash credit and overdraft are considered similar terms in the financial sector as they share similar characteristics. However, there are a few things they differ in. Here is a comparative assessment of both these financial products.

  • The borrowing limit of cash credit loans is determined based on the collateral value, while the same for overdraft depends on the financial statement and security deposits.
  • Cash credit is a short-term financing alternative whereas an overdraft is a long-term fund option.
  • Cash credit interest charged is lower while it is comparatively higher for overdraft.
  • Cash credit is used for business purposes, strictly for meeting working capital requirements. On the other hand, an overdraft is utilized for both business and non-business purposes.

Why Choose Roopya for Cash Credit Loans?

At Roopya, we will help you have the best cash credit loan for your business. The process to apply for loans is easier with us. Plus, our executives are always available to let you understand the entire procedure of loan approval. They will let you know the eligibility criteria you need to fulfill and the documents to be kept ready to proceed. In short, you will get the best guidance and financial support from our end.

FAQs

Q1. What is difference between cash credit and overdraft?

The differences between cash credit and overdraft are as follows:

  • The borrowing limit of cash credit loans is determined based on the collateral value, while the same for overdraft depends on the financial statement and security deposits.
  • Cash credit is a short-term financing alternative whereas an overdraft is a long-term fund option.
  • Cash credit interest charged is lower while it is comparatively higher for overdraft.
  • Cash credit is used for business purposes, strictly for meeting working capital requirements. On the other hand, an overdraft is utilized for both business and non-business purposes.

Q2. What are advantages of cash credit?

The advantages are as follows:

  • It is available to businesses that want to make liquidating assets easier.
  • With cash credit facility, borrowers have significant drawing power. Thus, they can withdraw money as and when required.
  • Interest payments are tax-decutible. Thus, you will have no tax burden.
  • You pay interest only for the borrowed funds.
  • You are free for depositing money whenever you have access to funds.

Q3. What is a cash credit loan?

Cash credit loans are loan amount offered to businesses by financial institutions. They use it to build their capital and obtain required resources to strengthen their market position. Thus, it is also known as a working capital loan.

Q4. Who is eligible for cash credit?

You are eligible for the loan onli if:

  • You are 25 years in age or above [The criteria might vary from lender to lender.]
  • Your business is operational for at least 3 years to act as a guarantee or collateral security.
  • You have filed IT returns for at least a year. [optional requirement]
  • Your type of business is eligible for this cash credit loan.
  • You have a collateral/security to offer as a guarantee against the loan amount.

Q5. Is cash credit a secured loan?

Yes, it is a collateral-based business loan. It is secured by company stocks and assets.

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