Cash Credit (CC) is a source of short-term finance for businesses and companies. Cash credits are also called working capital loans as they fund the instant cash requirements of the organizations, or to purchase current assets. Borrowing limits on the amount of cash available for credit for the company varies between commercial banks. The interest charged is on the daily closing balance instead of the upper borrowing limit, so the repayment is only on the amount spent from the available limit. Because it is taken for a short term, the repayment of the amount taken on credit is also set at 12 or less months. Cash credit is a loan and banks demand collateral to approve it. Cash credits are similar to overdraft facilities, though there are significant differences between them. Cash credit is available for a shorter period of time and at a significantly less interest rate than overdrafts. Cash credit is used by financial institutions and businesses and with a collateral, which thus becomes a loan, overdraft is approved on the basis of the relationship that the bank and customer share.
Important Features of Cash Credit
Interest on running balance
In contrast with other traditional debt financing methods such as loans, the interest charged is only on the running balance of the cash credit account and not on the total borrowing limit.
A cash credit comes with a borrowing limit determined by the creditworthiness of the borrower. A company can withdraw funds up to its established borrowing limit.
Minimum commitment charge
The short-term loan comes with a minimum charge for establishing the loan account regardless of whether the borrower utilizes the available credit. For example, banks typically include a clause that requires the borrower to pay a minimum amount of interest on a predetermined amount or the amount withdrawn, whichever is higher.
Cash credit is typically given for a maximum period of 12 months, after which the drawing power is re-evaluated.
The credit is often secured using stocks, fixed assets, or property as collateral.