When running a business, having enough cash to cover daily expenses and keep things running smoothly is essential. But sometimes, businesses don’t have enough money at hand. That’s where cash credit comes in. It’s a financial tool that helps businesses borrow money from a bank or financial institutions to cover short-term needs like paying for raw materials, employee salaries, or other operational costs.
In this guide, we’ll explain what cash credit is, how it works, and how it can help your business. We’ll also break down everything you need to know in simple terms, so even if you have no prior knowledge of finance, you can still understand it easily.
What is Cash Credit?
Cash Credit (CC) is a short-term loan given by banks to businesses to help cover their working capital needs. Working capital is the money needed to run daily business activities, like buying raw materials, paying employees, or keeping inventory stocked.
Instead of giving a large lump sum upfront, cash credit allows a business to borrow money as needed, up to a certain limit set by the bank. The key feature is that you only pay interest on the amount you actually use, not the full amount available to you.
Why Do Businesses Use Cash Credit?
Businesses use cash credit to ensure they always have money available to pay for day-to-day expenses. It’s like a safety net for companies facing cash shortages or fluctuations in their revenue.
For example, if a company needs to buy raw materials for production but doesn’t have enough cash on hand, they can use cash credit to borrow the money. Once they make sales and have cash coming in, they can repay the loan.
How Does Cash Credit Work?
Here’s how cash credit works, step by step:
- Loan Approval: When a business applies for cash credit, the bank reviews the company’s financial health. The bank will check things like the company’s credit history, business performance, and whether they can repay the loan.
- Credit Limit: Based on the review, the bank sets a limit—this is the maximum amount the business can borrow. For example, if a business is approved for ₹5 lakh in cash credit, they can borrow up to ₹5 lakh but only as needed.
- Withdraw Funds: The business can borrow funds whenever required, up to the limit. If they need ₹2 lakh for raw materials this month, they can borrow that amount.
- Repayment: The business pays back the loan based on an agreed schedule (monthly, quarterly, or as needed). They only pay interest on the amount borrowed, not the entire limit.
- Collateral: Cash credit is a secured loan, meaning the business has to offer something valuable as collateral (like property or inventory) to guarantee the loan. If the business fails to repay the loan, the bank can take the collateral to recover the money.
Key Features of Cash Credit
To make sure you understand cash credit better, here are its key features explained simply:
- Short-Term Loan: Cash credit is not meant for long-term needs. It’s a short-term loan, usually given for a period of 12 months or less. It helps businesses meet immediate financial needs.
- Interest on Borrowed Amount: One of the best things about cash credit is that you only pay interest on the amount you borrow, not the full credit limit. If your credit limit is ₹5 lakh, but you only use ₹2 lakh this month, you will pay interest only on ₹2 lakh, not ₹5 lakh.
- Secured Loan: Banks require collateral to approve a cash credit loan. This could be in the form of inventory, property, or other business assets. Collateral helps protect the bank in case the business fails to repay the loan.
- Flexibility: Cash credit gives you the flexibility to withdraw funds whenever you need them, up to your credit limit. This makes it a great option if your cash needs change frequently.
- Repayment Schedule: Cash credit loans can be repaid monthly, quarterly, or as agreed between you and the bank. You don’t have to repay the entire loan at once, which makes it easier to manage payments.
- Cheque Book Access: Once approved, you may receive a cheque book linked to your cash credit account. This makes it easy to access the funds and use them whenever required.
How Does Cash Credit Help Businesses?
Businesses face unexpected expenses and cash flow gaps. Here’s how cash credit can help:
- Buying Raw Materials: If your business needs to buy raw materials to keep production going, cash credit can provide the funds to do so. This helps ensure you don’t run out of materials and can continue making your products.
- Maintaining Inventory: Keeping products in stock is crucial for businesses. Cash credit helps ensure you have enough money to maintain inventory levels and meet customer demand.
- Paying Salaries and Rent: Every business needs to pay salaries to employees and cover overhead costs like rent. Cash credit gives you the money you need to pay these regular expenses, ensuring your business runs smoothly.
- Funding Marketing or Sales Activities: Cash credit can also be used to fund marketing campaigns or pay for sales efforts, helping your business attract more customers and grow.
Cash Credit vs Overdraft: What’s the Difference?
Cash credit and overdrafts are similar because both allow businesses to withdraw more money than is available in their account. However, they differ in several important ways:
| Feature | Cash Credit | Overdraft |
| Interest Rate | Typically lower | Higher interest rates |
| Purpose | Primarily for business needs and working capital | Can be used for personal or business expenses |
| Security | Requires collateral (like property or inventory) | Usually no collateral required, based on your relationship with the bank |
| Loan Amount | Based on business assets like inventory | Based on the available balance in your account |
| Repayment | Flexible, often monthly or quarterly | Linked to your account balance and can change |
| Account | Requires a separate loan account | Linked to an existing account |
So, if you’re a business owner looking to manage working capital, cash credit is often a better option than an overdraft, which is typically used for personal or shorter-term borrowing.
How to Apply for Cash Credit?
Applying for cash credit involves a few simple steps:
Eligibility Check
Make sure your business meets the eligibility requirements. This usually includes:
- The business must be in operation for at least 3 years (some banks accept 1 year).
- You need a good credit history to qualify for a higher loan limit.
- Collateral (like property, inventory, or raw materials) is required.
Documentation
Prepare the necessary documents, such as:
- Financial statements (prepared by a certified accountant)
- Bank statement for the past 1 year / 6 months
- Tax returns for at least 3 year
- Proof of collateral (property deeds, inventory list, etc.)
Submit Application
You can apply online or visit the bank in person with all your documents. The bank will then review your application and decide whether to approve the loan.
Benefits of Cash Credit
Here are some of the main benefits of using cash credit for your business:
- Quick and Easy Access to Funds: You can withdraw money anytime, up to your credit limit.
- Pay Interest Only on What You Use: You won’t pay interest on the full loan amount, just the portion you use.
- Flexible Repayment Terms: You can agree on repayment schedules that suit your business cash flow.
- Tax Benefits: Interest paid on cash credit is often tax-deductible, reducing your overall cost of borrowing.
Things to Keep in Mind
While cash credit is a great tool, there are a few things you should keep in mind:
- Collateral Risk: If you don’t repay the loan, the bank can take your collateral (like your inventory or property).
- Annual Renewal: Cash credit is usually given for 12 months. After that, you need to renew the loan and the bank may adjust the credit limit based on your business performance.
- Processing Fees: Banks may charge fees to process the loan or for any unused portion of the loan.
Conclusion
Cash credit is a great option for businesses that need quick access to funds to cover their working capital needs. With its flexible withdrawal and repayment terms, cash credit helps businesses manage their day-to-day expenses smoothly. By understanding its key features, benefits, and application process, you can make the most of cash credit to keep your business running efficiently.Whether you need funds to buy materials, pay salaries, or keep your business stocked, cash credit can be the financial tool that helps you stay on track and continue growing. If you think cash credit is right for your business, consider applying today to manage your cash flow better.
