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There are many types of business loans extended to small businesses. One of the popular short-term loan products in India is a cash credit loan. This short-term financing option is open to all businesses and can be used to fund working capital requirements.
What is a cash credit loan?
Cash credit loan is a short-term financing facility extended to companies that hold business bank accounts. This facility is extended by banks to help businesses withdraw cash over and above the current balance of their bank account.
For example, you want to fund a new marketing campaign and the budget set by the marketing team is ₹2 lakh. You decide to fund this expenditure using a cash credit loan. You approach your bank where you hold a business account and request them to open a cash credit account for you. Once you open a cash credit account you can apply for the loan.
You might be confused as to how a cash credit loan is different from the overdraft facility, another popular source of business finance. Have a look at the differences between cash credit and overdraft facility:
Cash credit vs overdraft
Cash credit and overdraft are both short-term financing options provided by financial institutions. Both these accounts protect you against situations when there are insufficient funds in checking accounts and stops your checks from bouncing or debit cards from being declined.
But both are two different types of short-term loans:
|Facility is for businesses
|Facility is extended to businesses and individual customers
|You need collateral for a cash credit loan
|You don’t need collateral for the money overdrawn
|For maintaining working capital of the business
|To fulfill short term obligations
|Rate of interest is relatively lower than overdraft
|Rate of Interest is higher than cash credit
|Duration of the loan is one year
|Repayment tenure can be monthly, quarterly, half-yearly or yearly
Benefits of a cash credit loan
There are multiple benefits of availing cash credit loans:
- Short term loan
It is an excellent short-term business loan capable of meeting all your working capital requirements. The loan duration is typically a year.
- Freedom to split the loan amount to use for different purposes
The cash credit loan, once approved, is deposited in your account. You need not withdraw the entire amount at once. You have the freedom to withdraw the amount in parts.
- Flexible interest payments
Since you can withdraw the loan amount in parts you only need to pay the interest for the amount you have utilised.
- Multiple collateral options
Apart from common collateral options like property, machinery, etc., you can choose to take the loan against fixed deposits, stocks or any other financial instruments.
- No restrictions placed on the number of withdrawals
As mentioned before, there is no restriction on the number of withdrawals you can make until you finish the loan amount deposited in your account.
- Deposit whenever you have funds
You can deposit money to the cash credit account whenever you have some spare cash left after your business expenses. This will help you finish repayment quicker.
What business activities can be funded by a cash credit loan?
- Inventory management
- Paying employee salaries
- Repairs for a machine
- Funding sales and marketing campaigns
- Purchase of raw materials
- Applying for patent registration
- Participating in national trade fairs
Cash credit loans have relaxed eligibility criteria compared to other business loan eligibility criteria as they are often sanctioned for small amounts with short tenures. Have a look at the eligibility for a cash credit loan:
- Business must have been in existence for at least a year
- The company should have a business account in the bank
- The financials of the business must be strong
- Should be a GST registered enterprise
- Monthly or quarterly stock statements
- Book debts statements
- CIBIL score must be at least 600 and above
Given below are the documents to be submitted along with the application for cash credit facility:
- ID proof including Aadhaar and PAN card.
- Audited financial statements of the last 2 years
- Income tax returns filed in the last two assessment years
Interest rates for cash credit loans
As mentioned before, the interest rate is charged only on the amount withdrawn and not on the total sanctioned limit. The interest rate charged will depend on the company’s risk profile, past loan repayments, the loan amount requested, etc. It can also depend on market conditions; therefore, cash credit loan interest rates vary regularly.
Banks that offer cash credit facility
Most banks that invite businesses to open current accounts and offer business loans should have the cash credit loan facility. You can approach a bank with which you already have a business account open and have an established banking relationship. They will easily sanction the loan considering the fact that the loan is short-term, reducing the risk of their investment.
Here are a few banks you can approach for cash credit loans:
- HDFC Bank
- Bajaj Finserv
- Indian Bank
- Bank of Maharashtra
- Federal Bank
The interest you pay on a cash credit loan is tax-deductible. The main objective of the loan is to fund your short-term financial obligations easily and quickly. This also helps you handle those delayed payments to vendors when your account has insufficient balance.