Cash credit is a facility to withdraw money from a current bank account without having credit balance but limited to the extent of borrowing limit, which is fixed by the commercial bank. The interest in this facility is not charged on the borrowing limit, which is given by the bank but on the daily closing balance.
How does a Cash Credit Loan Work?
Cash Credit Loan can be liked to a line of credit too. In cash credit loan, the lender sanctions a limit to the business. The amount sanctioned depends upon the need of the funds, the existing current assets and current liabilities of the business, creditworthiness, repayment capacity, etc.
Within the sanctioned limit, the business can withdraw any amount as per its requirement. The withdrawals are regulated and the withdrawal limit is arrived at based on the structure of current assets and liability The bank, however, has the right to recall the amount at any time which the borrower is under obligation to return immediately.
The amount withdrawn under the cash credit loan is charged a rate of interest which is again decided based on the collateral offered, creditworthiness, etc.
Security Cash credit loan is granted against hypothecation of stock and assets such as raw materials, work-in-process, finished goods and stock-in-trade, including stores and spares along with collateral security i.e. Residential, Commercial or Industrial Property as per bank norm.