Cash credit is a financial product offered by banks to businesses that need working capital to meet their day-to-day operational expenses. It is a type of revolving credit facility where the borrower can withdraw funds as and when required, up to a pre-approved limit, and repay the same at their convenience. In this blog post, we will delve deeper into what cash credit is, its features, advantages, and disadvantages.
Features of Cash Credit
- Credit Limit – The bank determines a credit limit based on the borrower’s creditworthiness, repayment history, and other factors. The borrower can draw funds from this limit as and when required.
- Interest – Interest is charged only on the amount utilized by the borrower, not on the entire credit limit. The interest rate is generally higher than other forms of financing, such as term loans, as it is a short-term borrowing option.
- Repayment – The borrower has to repay the borrowed amount within a specific period. The repayment schedule can be daily, weekly, or monthly, depending on the agreement between the borrower and the lender.
- Collateral – The borrower may have to offer collateral in the form of inventory, receivables, or fixed assets to avail of the cash credit facility.
Advantages of Cash Credit
- Flexibility – The borrower can withdraw funds as and when required and repay the same at their convenience. This flexibility makes cash credit an ideal financing option for businesses with fluctuating cash flows.
- Cost-Effective – As the interest is charged only on the amount utilized, it is a cost-effective financing option for businesses that require short-term funds.
- Quick Approval – Cash credit facilities are typically approved quickly, as banks do not have to perform extensive due diligence as they would for other types of financing options.
Disadvantages of Cash Credit
- High-Interest Rates – Cash credit facilities have higher interest rates compared to other forms of financing, making it an expensive borrowing option for businesses with a low credit rating.
- Collateral Requirement – Banks may require collateral in the form of inventory, receivables, or fixed assets, making it challenging for small businesses to avail of this facility.
- Limited Timeframe – Cash credit facilities have a limited timeframe, and businesses have to repay the borrowed amount within a specific period, which may not be suitable for all businesses.
Cash credit is a popular financing option for businesses, particularly small and medium-sized enterprises (SMEs) that require quick and easy access to funds to meet their working capital requirements. It is a flexible and convenient option that allows businesses to manage their cash flow efficiently.
One of the main advantages of cash credit is its flexibility. Businesses can withdraw funds as and when required, up to a pre-approved credit limit. This allows them to manage their cash flow better and meet their short-term financing needs. Cash credit also offers businesses the convenience of repaying the borrowed amount at their convenience, based on their cash flow requirements.
Another advantage of cash credit is that it is a cost-effective financing option for businesses. Interest is charged only on the amount utilized by the borrower, not on the entire credit limit. As a result, businesses can save on interest costs, making cash credit an ideal financing option for short-term funding needs.
However, cash credit also has its disadvantages. One of the main drawbacks of cash credit is the high-interest rate charged by banks. The interest rate is generally higher than other forms of financing, such as term loans, making it an expensive borrowing option for businesses that require long-term funds. Businesses with a low credit rating may also find it challenging to avail of cash credit, as banks may require collateral in the form of inventory, receivables, or fixed assets.
Another disadvantage of cash credit is the limited timeframe for repayment. Businesses have to repay the borrowed amount within a specific period, which may not be suitable for all businesses. This is because cash credit is a short-term borrowing option that is designed to meet the short-term financing needs of businesses. If businesses require long-term financing, they may need to explore other financing options.
Conclusion
In conclusion, cash credit is a popular financing option for businesses that require short-term funds. It is a flexible and cost-effective option that allows businesses to manage their cash flow efficiently. However, it also has its disadvantages, such as high-interest rates, collateral requirements, and a limited timeframe. Businesses must carefully evaluate their financing needs and creditworthiness before opting for cash credit.
Other Related Blogs: Section 144B Income Tax Act
Frequently Asked Questions (FAQs)
Q: What is cash credit? A: Cash credit is a type of revolving credit facility offered by banks to businesses. It is a short-term borrowing option where the borrower can withdraw funds as and when required, up to a pre-approved limit, and repay the same at their convenience.
Q: What are the features of cash credit? A: The key features of cash credit include a credit limit, interest charged only on the amount utilized, a repayment schedule, and collateral requirements.
Q: Who is eligible for cash credit? A: Businesses that require short-term funds for their day-to-day operational expenses are eligible for cash credit. Banks determine eligibility based on the borrower’s creditworthiness, repayment history, and other factors.
Q: What is the interest rate for cash credit? A: The interest rate for cash credit is generally higher than other forms of financing, such as term loans. The rate is determined based on various factors, such as the borrower’s creditworthiness, market conditions, and other factors.
Q: What are the advantages of cash credit? A: The advantages of cash credit include flexibility, cost-effectiveness, and quick approval. It is an ideal financing option for businesses with fluctuating cash flows.
Q: What are the disadvantages of cash credit? A: The disadvantages of cash credit include high-interest rates, collateral requirements, and a limited timeframe for repayment.
Q: How do businesses repay cash credit? A: Businesses can repay cash credit as per the agreed-upon repayment schedule. The repayment schedule can be daily, weekly, or monthly, depending on the agreement between the borrower and the lender.
Q: How does cash credit differ from other forms of financing? A: Cash credit is a short-term borrowing option, whereas other forms of financing, such as term loans, provide long-term financing. Cash credit is also a revolving credit facility, where the borrower can withdraw funds as and when required, up to a pre-approved limit.
