A cash credit loan is a short-term source of finance, having a tenure of up to one year. Under the short-term finance option, the bank offers its applicant to take a loan up to a certain limit depending on their credit history.
This type of loan is extended to businesses and companies to fulfill their working capital requirement. This allows the customer, typically a business or company with a proven track record of profit, to withdraw money which is more than the balance available in their accounts. Cash credit is also known as Bank Overdraft facility.
Leading banks, such as IDBI Bank provides cash credit facility for businesses to finance their day-to-day requirement. The finance can be utilized for the purchase of raw materials, stores, fuel, for payment of wages for labor, power charges, for storing goods till they are sold out & for financing the sales by way of sundry debtors/receivables. Cash Credit facility is granted to companies to bridge the working capital gap, by way of a running account. The withdrawals are regulated and the withdrawal limit is arrived at based on the structure of current assets and liability.
BREAKING DOWN 'Bank Guarantee'
A bank guarantee is a lending institution's promise to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity. For example, Company A is a new restaurant wanting to buy $3 million in kitchen equipment. The equipment vendor requires Company A to provide a bank guarantee to cover payments before shipping the equipment. Company A requests a guarantee from the lending institution keeping its cash accounts. The bank essentially cosigns the purchase contract with the vendor.
Cash Credit (CC) is granted against hypothecation of stock and assets such as raw materials, work-in-process, finished goods and stock-in-trade, including stores and spares.
Features of Cash Credit
1. This loan is given to meet the working capital requirements of a business.
2. It is given against a collateral security.
3. Interest is generally charged only on the amount of loan taken by the customer and not on the amount of credit sanctioned.
4. This is a short-term loan with specified monthly/quarterly repayment structure as decided by the lender.
5. The applicant is allowed to withdraw the funds made available to him to meet the day to day working capital requirement by way of a running account.
6. A cheque book is issued in the name of the company and he can withdraw funds as per requirement
7. The applicant has the option to repay the loan as frequently as desired (daily/weekly), or as per the repayment, the structure is drawn by the lender.
8. Even individual applicants can avail this type of facility against their fixed deposits (as a loan) and save on interest.
This comes in handy when the applicant is in need of urgent funds and can't liquidate the deposit made.