Every business irrespective of the scale faces critical financial problems that occur due to the shortage of working capital. Entrepreneurs find they exhausted and worked up in search of money to keep their business on track. To cater to the sudden shortage of money, banks have come up with credit limit, called as cash credit. A current account is the cash credit account which business people use to meet any sudden financial crises.
What is Cash Credit?
It is a short-term loan that is offered to the company by the bank. This arrangement enables the company to withdraw a certain sum of money from a bank account with no credit balance stress. Interest is charged on the amount borrowed. To understand cash credit better, consider an example of a business, where the owner invests his money to purchase raw materials. The business owner’s investment in goods doesn’t start to immediately yield results. Even after the raw materials are converted to finished product, it takes time for the product to reach the market. After reaching the market the product doesn’t immediately contribute to return in investment. The capital still exists in the form of inventories the situation worsens when the business people suddenly find themselves stuck with the loss of funds or the working capital to purchase more raw materials. In order to cater to the businesses’ need for capital, banks deploy cash credit facility.
Features of Cash Credit that business people must know before opting for it
- Business owners can’t opt for credit limit from more than one bank. Once you have availed it from a bank you can’t opt for any other bank.
- The stock statement is a must to submit, as this shows stocks, creditors, debtors, and balance on a monthly basis.
- Prior to CC if you have opted for any other loan, then you must inform about the same to the cash credit banker.
- Collateral security helps uphold the cash credit facility.
- It is also under the norms of some that the name of the bank that has agreed to grant its CC facility must be placed ad hung on the premises of stock of client.
- Stocks and receivables once hypothecated to the CC banker can’t be hypothecated anywhere else.
- The bank holds the authority to hold periodic inspections of business and stocks, these inspections include financial audit, stock audit, compliance of returns to the bank, etc.
When entrepreneurs wish to expand the business, they look out for cash credit facility. There are certain calculations that are incorporated by the bank to fix the cash credit limit. The bank checks both, stock and the receivable of the company. The assessment is then attempted to match the cover period. Based on all the assessment and preemption, the bank fixes the cash credit limit for the business.
Advantages of Cash Credit
- Cash credit is a great source for business people to help meet sudden financial crises so that the business activity doesn’t stop.
- Interest is charged basis the amount is withdrawn and not the entire limit, this helps lower the interest cost.
- The principal amount is required to be repaid since there exists no monthly installment payable.
- The credit line can be used by the businessmen in case of emergency, as an amazing standby option.
- The cash credit acts as a temporary source of raising fund, which can act as an alternative to capital deployed. This helps business people avail hassle free capital amount.
- Business people benefit from this arrangement, as this acts as supporting hand to help them carry out their day to day business activity.
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