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Cash Credit Loan – Features & How It is Different from Overdraft

Updated: Jan 2

What is a Cash Credit Loan?

It is vital for any business to finance its daily operations continuously and Cash Credit can help a business in doing so. Cash credit is a type of loan that provides funds for fulfilling the working capital requirements of a business such as purchasing raw materials, maintaining inventory, salaries and rent.

It is a short-term loan with a repayment period of up to twelve months. Banks and Financial Institutions offer cash credit mainly based on the credit history and financial stability of the business.

Features of Cash Credit Loan

1. Secured Loan: Borrower MUST provide collateral to the lender to avail cash credit loan. Borrower can provide assets as collateral namely, inventory, work in progress, plant & machinery., gold and so on. However, certain lender accepts only real estate or inventory as collateral. Therefore, the borrower must enquire about the collateral with the lender.

2. Withdrawal of Funds: Borrower can withdraw funds numerous times as per the requirement up to the sanctioned limit.

3. Interest Payable: Interest is payable only on the amount withdrawn or utilized by the borrower instead of the sanctioned credit amount. For example, if the sanctioned limit is Rs. 100000 and the borrower has withdrawn only Rs. 50000 and the rate of interest is 6%, then, the interest payable is 50000*6% i.e., Rs. 3000

4. Running Account: Generally, businesses have a running account for cash credit loans and whenever the need arises, businesses can utilize the funds from that account.

Businesses that do not earn revenue throughout the year or have long operating cycles or high seasonality can avail of the facility of Cash Credit Loans provided by banks and Financial Institutions.

Overdraft vs cash credit: what is the difference?

  1. Interest rates: While you can avail of funds at a lower interest rate with cash credit, the rates are higher with an Overdraft facility.

  2. Security: To avail of cash credit, you must hypothecate your stocks and inventory. In contrast, overdrafts can be availed based on your financials, credit history, investments, relationship with the bank, etc.

  3. Purposes: Cash credit is usually available for business purposes, especially as working capital. Overdrafts can be availed for any general purpose, including business-related expenses.

  4. Loan amount: With cash credit, the loan amount sanctioned is based on the volume of stocks and inventory. On the other hand, the loan amount sanctioned under overdraft is based on financials and security deposits.

  5. Limit: While the limit does not reduce with cash credit, it reduces every month with an overdraft.

  6. Account: To avail of cash credit, you must open a new bank account, whereas you can access overdraft via an already existing account.

  7. Tenure: You can avail of cash credit for a minimum of 1 year, whereas the tenure of overdraft ranges from a month, a quarter to a maximum of 1 year.

  8. Applicants: Cash credit can be availed by individuals, traders, manufacturers, retailers, distributors, partnerships, companies, sole proprietorships, LLPs, etc. On the other hand, overdrafts can be applied for by account holders of the respective banks.

How to Apply for Cash Credit Loans in different banks?

1. Check the eligibility criteria by evaluating factors such as credit score, income, liquidity and solvency ratios.

2. Choose a lender after comparing interest rates, fees and terms & conditions offered by different lenders to the borrower.

3. Gather documents such as identity proof, PAN Card, financial statements of business and bank statements.

4. Complete the application via online or offline mode.

5. The lender will review the application and let the borrower if it is approved or not.

6. Once the application is approved, sign the loan agreement.

7. Finally, the lender will disburse the funds in the borrower’s account.

While applying for a loan a borrower should compare lenders for the best possible interest rate and terms & conditions and provide necessary documentation to the lender.

For other interesting conceptual topics please visit our other contents:

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