Cash Credit: Eligibility, Features etc.

Capital is a critical component in every business, and a lack of it can stop the company's growth. So, meeting capital requirements is one of the essential aspects to take care of when running a business. Relying on external financial assistance is the best way to ensure that a company has sufficient funds to run the firm smoothly. And cash credit is one such popular financial aid for every business, irrespective of the age of the brand. Read further to understand more about cash credit.

What is cash credit?

Cash credit is a short-term loan or funding offered by banks and financial institutions for a company to meet its operations and deal with daily business expenses. The loans are sanctioned based on the credit history and the company's stability financially. Businesses can use the funds for various business activities, such as expanding the firm, purchasing new and updated machinery, investing in raw materials, hiring staff, clearing debts, and others if a company procures cash credit loans.

The businesses must hypothecate the stocks and other receivables to avail of working capital loans like cash credit. The enterprises can only borrow the sanctioned loan limit from the lender by submitting collateral or other securities, and they get a 12-month repayment tenure where they can renew the loan. The amount can immediately help the business as soon as they access the money.

Cash credit role in businesses:

Availing to cash credit loans during financial instability helps businesses in many ways. Some of the crucial aspects are:

1. Purchase raw materials: Raw materials are the root cause of any business's success. As a business owner, you cannot have a profitable business when you do not have raw materials. During financial instability, you can purchase manufacturing goods on time with cash credit promptly.

2. Maintain Inventory: Similarly, inventory is an integral part of every business. With cash credit, you can be sure that you have the funds to keep up with the inventory stock.

3. Pay salaries and rent: Another essential indirect expense of a business is paying salaries to the team and rent for the office space. Cash credit supports you with indirect costs like these.

4. Finance sales: Selling your dream products or services requires selling and a marketing strategy. To market the product online and offline, the firms need money. So, cash credit funds these expenses and helps reach your product to many people.

Features of cash credit:

The features of cash credit are as follows:

1. It is a short-term loan that any business can avail of for its operations.

2. Businesses get a period of 12 months to repay or renew the loan.

3. Only the withdrawn amount takes the interest, not the sanctioned money.

4. Enterprises can only get a loan when they provide security for the money taken.

5. Companies with high credit scores and repayment history cannot get a higher-limit cash credit loan.

6. Businesses turn over, and volume plays a significant role when banks and financial institutions decide on sanctioning the limit.

7. Firms can repay the money taken weekly, monthly, quarterly, or half-yearly via cash credit.

8. An individual borrower can avail of the cash credit against their fixed deposits.

9. The interest paid is tax-deductible, and the lender can recall the sanctioned money.

Disadvantages of cash credit:

1. As cash credit is a short-term loan, businesses cannot rely on the sanctioned amount for long. Once the loan is expired, the firm can renew the loan while the terms and conditions re-evaluated.

2. Recently established businesses and start-ups may have difficulty getting cash credit loans as the approval depends on past profit records.

3. Businesses have to pay the minimum commitment charges even if the firm does not use cash.

4. The interest rates are very high for cash credit loans.