You always have to be on the lookout for ways to meet your capital requirements when you own a business. Capital is an integral element of any business operation, and the lack of it can limit your enterprise’s growth. To ensure that you have sufficient funds to run your business seamlessly, you can rely on external financial assistance. One such popular form of financial aid is cash credit. Continue reading to learn more about cash credit’s meaning and uses for business.

What is meant by Cash credit?

Cash credit is referred to as short-term funding or loan for a company so that it can meet its working capital requirements. Cash credit is a sort of loan that is offered to businesses by financial institutions like banks. Banks offer cash credit to businesses based on the latter’s credit history and financial stability. If you procure funds via cash credit, you can use it for various business-related purposes like expansion, purchasing plant and machinery, raw materials, hiring staff, debt consolidation, etc.

If you want to avail of a Working Capital Loan like cash credit, you have to hypothecate your stocks and receivables. You can repay the loan amount in a tenure of up to 12 months that can be renewed. As a business, you can only borrow up to the sanctioned limit from the lender. You also need to submit collateral or security to avail of Cash Credit. Once you avail of the funds, it can instantly help you manage any cash crunch in your business activities.

What are the features of cash credit?

The features of cash credit are as follows:

• It is a short-term loan with a repayment period of up to 12 months.
  
• The interest rate is charged only on the amount withdrawn and not on the total sanctioned limit.
  
• You can withdraw money as many times as required from within the sanctioned limit.
  
• It is only offered if you provide collateral or security.
  
• If your business has a higher credit score and repayment history, you will be able to avail a higher limit via cash credit.
  
• Banks and financial institutions consider your business’ turnover and volume while deciding the limit sanctioned.
  
• You can repay the amount borrowed via cash credit either monthly, quarterly, or half-yearly.
  
• If you are an individual borrower, you can avail of cash credit against your Fixed Deposit.
  
• The lender can recall the sanctioned amount on short notice.
  
• The interest you pay on Cash Credit is tax-deductible.
  

How does cash credit help businesses?

Cash credit can help your business with the following:

• Purchasing raw materials: As a business owner, your operation cannot go on smoothly if you do not have adequate raw materials. With cash credit, you have the liquidity to purchase raw materials in a timely manner.
  
• Maintaining inventory: Similarly, your inventory is integral to your business. When you avail of cash credit, you ensure that you have the funds to keep your inventory fully stocked to service your clientele.
  
• Paying salaries and rent: As an entrepreneur, you have to factor in costs like your staff’s salary and overheads like rent. Cash credit can be used for any purpose and can help you meet such essential business expenses.
  
• Financing sales: Your goods and services will only sell if you have a strategy in place. You can use the funds availed via cash credit to finance a marketing and sales team that can ensure that word about your business gets around.
  

Now that you know more about what cash credit means, you can rely on it to help you out of a tight financial spot.

HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.

To learn more about the various products and services at HDFC Bank that can benefit your enterprise, you can check out the MyBusiness page here.

Is cash credit or overdraft better for your business? Click here to read more!

*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.

Cash Credit is short-term funding or loan for a company to meet its working capital requirements. Bank offers loans to an enterprise depending on its credit history and financial stability. Funding procured from cash credit loans can be used for various business purposes, such as business expansion, buying plant and machinery, purchasing raw materials, enhancing stocks, hiring staff, paying-off salaries, undertaking training, debt consolidation, etc. Cash credit has a loan repayment tenure of a maximum of up to 12 months that can be renewed.

Table of Contents :

1. What is Cash Credit
2. Cash Credit Loan Interest Rate
3. Features of Cash Credit
4. How Cash Credit Works
5. Documents Required
6. How to Apply for Cash Credit
7. Who can avail for this loan
8. Pros and Cons of Cash Credit

Cash credit is a type of working capital loan in which money can be withdrawn against the hypothecation of stocks and receivables. Cash credit instantly helps businesses in overcoming the cash crunch situation during business tenure. This working capital loan can be availed either in form of a secured loan or an unsecured loan. The business is limited to borrowing only up to the sanctioned limit from the lender. Businesses need to submit collateral or security to avail cash credit wherein the collateral to be submitted can be in the form of fixed assets, stock-in-trade, raw materials, finished goods, equipment, property, etc.

Cash Credit Interest Rate

The interest rate for availing Cash Credit loan varies from bank to bank which shall change from time to time and depends on the creditworthiness and financial history of the applicant.

Features of Cash Credit

• Cash credit is a short-term loan with a repayment period of 12 months
• Interest rate charged by the lender is on the money withdrawn and not on the total sanctioned limit
• Money can be withdrawn any number of times from the sanctioned limit
• Cash credit is always offered against collateral or security
• Higher limits can be availed by businesses with good credit scores and repayment history
• Credit limit is sanctioned considering the company’s turnover and volume
• Cash credit can be repaid in form of monthly, quarterly, or half-yearly repayments
• Individual borrowers can also avail cash credit against their Fixed Deposits
• Lender has an option of recalling sanctioned amount at short notice
• Interest rate paid on cash credit is tax-deductible

How it Works

Cash credit permits an enterprise to withdraw money from a bank account. The money can be withdrawn a number of times until the total sanctioned limit is reached. The cash limit is defined by the lender as per the applicant’s profile, CIBIL score, and creditworthiness. These factors are based on the borrower’s company structure and its assets and liabilities.

Documents Required

• Duly filled application form with Passport-sized photographs
• Business PAN card
• KYC documents: Applicant’s Passport, Driving License, Voter’s ID card, PAN card, Aadhar card, Utility Bills (Water/ Electricity Bills)
• Income Proof: Last 6 months’ bank statement
• Business Incorporation Certificate
• Business address proof
• Ownership proof: Company’s deed
• Details of collateral or security to be submitted
• Any other document required by the lender

Procedure to avail Cash Credit

The initial step is that bank or lender sanctions a limit to a business or enterprise and from the assigned limit, businesses can withdraw money as per their requirements. However, the limit sanctioned by the lender depends on the current assets and liabilities of the business. Strong and financially sound establishments are sanctioned with higher limits, as compared to businesses with lesser finance or lower credit score. The interest rate charged by the bank or lender depends on the creditworthiness and submitted collateral by the company. Check your credit score to avail Cash credit at comparatively lower interest rates.

Eligible Entities

Cash Credit Facility can be availed by Individuals, Professionals, Business Owners, Companies, Partnerships, Sole Proprietorships, Limited Liability Partnerships (LLPs), Co-operative Societies, and Registered Trusts engaged in manufacturing, trading, and services categorized under MSME.

Advantages and Disadvantages of Cash Credit

Pros	Cons
Amount can be withdrawn multiple time from the sanctioned limit	Rate of Interest is High
Interest Rate charged only on the withdrawn or utilized amount	Short-term Loan
No Credit score check is required	Lesser repayment period of 12 months
Interest paid is tax-deductible	Difficult to avail by Startups
Quick and easily accessible with flexibility	Used mainly to meet working capital requirements

Cash Credit offered by Leading Banks/NBFCs

Availing cash credit loan becomes difficult, if due to market fluctuations the performance of the enterprise goes down during business tenure. However, if the business is doing well then the lender sanctions the cash credit at ease, as the chances of its repayment capacity increase. The financial institution sets a pre-determined credit limit based on the previous year’s performance, the current year’s estimated performance, and projections for the next year. Businesses can reduce the interest rate burden by depositing money at regular intervals or whenever possible.