As a business owner, it is important to pay attention to capital requirements. Capital is the lifeblood of every business and without adequate capital, your business growth can be hampered. To keep everything running smoothly, sometimes you have to raise financial support through other resources. Cash credit is a popular option to get additional funds.
Imagine if there was a short-term loan that allowed you to withdraw more money than what is available in your bank account. It gives you financial security and financial support whenever you have a cash flow problem in your business. Read this blog to know what is cash credit and how it can help your business.
What is cash credit and how can businesses benefit from it?
Cash credit is a type of short-term funding option or loan provided to businesses to help them meet their working capital requirements. Financial institutions, such as banks, offer cash credit to companies based on their credit history and financial stability.
So, how does it work? When you receive funds through cash credit, you can use them for a variety of business-related needs. Whether expanding your operations, purchasing new plant and machinery, buying raw materials, hiring staff or consolidating debts, cash credit helps you meet every financial need.
To avail a working capital loan like cash credit, you need to pledge your stocks and receivables as security for the loan. You usually get up to 12 months to repay the loan and this period can be renewed. However, you can only borrow up to the limit sanctioned by the lender. Additionally, you need to submit collateral or security to be eligible for cash credit.
Once you receive funds, you get immediate help to manage cash flow issues in your business activities. Cash credit acts as a financial security to ensure that your business operations continue uninterrupted even in times of financial stress.
What are the features of cash credit?
To understand cash credit better, let us look at its features in detail.
Short-term loan:
Cash credit is a short-term loan facility that offers a repayment tenure of up to 12 months. Being short-term, it is an ideal option for immediate and recurring financial needs in a business cycle.
Interest only on withdrawn amount:
Interest is payable only on the amount withdrawn from the sanctioned limit for use, and not on the entire sanctioned credit limit. This facility reduces the interest burden on the business, making it an affordable borrowing option.
Flexible withdrawals:
You can withdraw money as many times as you need, subject to the business sanctioned limit. This facility allows businesses to manage cash flow more effectively and meet financial requirements when needed.
Collateral Requirement:
To obtain a cash credit facility, a business must provide collateral or security. This usually includes hypothecated assets such as stocks and receivables, and sometimes additional collateral such as property or equipment.
Higher Limits for Better Credit Scores:
Businesses with higher credit scores and good repayment history are eligible for higher cash credit limits. This means that the business must make timely repayments and maintain creditworthiness.
Turnover and Business Level Assessment:
While determining the sanction limit, banks and financial institutions assess the turnover and level of the business. Higher turnover and volume levels in a business are sanctioned for higher credit limits, which reflect the business’s ability to generate revenue.
Flexible repayment options:
Borrowers can choose from a number of options to repay their borrowed amount, including monthly, quarterly or half-yearly instalments. This facility allows repayment to be made as per the cash flow pattern of the business.
Cash credit against fixed deposits:
Individual borrowers can avail cash credit against their fixed deposits. This is a convenient option for those who have invested a large amount in fixed deposits and need immediate cash.
Repayment of loan at short notice:
The lender has the right to repay the sanctioned amount at short notice. This facility allows the lender to manage the risk and hence it is important for the borrower to be prepared for such situations.
Tax-deductible interest:
The interest paid on cash credit is tax-deductible, which provides financial benefits to the business. This tax benefit can help you save a lot, thereby reducing the overall cost of borrowing.
Read Also - What is C.C. Limit
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