Every business people at some point of time face a critical financial problem due to current shortage of working capital to run their business. Entrepreneurs become exhausted in searching for money to continue their business without any loss in production. In order to solve sudden shortage of money, banks helps business people a running credit limit, called as cash credit, popularly known as CC. Cash credit account is normally like a current account which is used by the business people to meet their sudden financial crises.
What is Cash credit?
Let us consider an example how cash credit helps business people, for that let us consider a factory where the business owner invest money to buy raw materials these raw materials are then converted into finished goods. The intermediary goods are called as work-in-progress. The raw materials, work-in-progress and finished goods together constitute inventories.
The business owner’s fund invested as inventories does not converted into money with in short period. Even the finished goods after reaching customers also do not contribute to the return in investment of the owner immediately. The owner’s capital still be in the form of inventories, credit source from customers as bills receivable. This situation becomes adverse when business people are suddenly stuck with devoid of funds, or in other words- working capital, to run their business for buying raw materials and also to meet their daily business expenses.
In order to solve this critical situation here comes cash credit to help business people to run their business successfully without any shortcomings.
Factors determining Cash Credit Limit
When business people wants to expand their business with this cash credit facility, the bank fixes cash credit limit based on certain calculations. They check both stocks and receivables of the company and try to match it with the cover period which is the normal credit period for the customers. Based on these they calculate the drawing power and then fix the CC limit for the business. Cash credit is completely a secured facility, where proper check of business’s inventory cycle, collection cycle from debtors and payment cycle to creditors are verified before fixing the limit. Bank also checks loan to value compare it with the turnover of the company and select the lowest one in fixing the CC limit.
Features of CC :
- The business has to submit a stock statement every month, showing the stocks, creditors and debtors balance month on month.
- Once, a cash credit limit is availed in one bank, the business cannot parallelly have another Cash Credit limit in another bank
- Any loans taken post availment of this facility, has to be kept informed to the CC banker.
- Stocks and Receivables would be hypothecated to the CC banker, and hence cannot be hypothecated else where.
- This facility is secured generally with collateral security.
- The Name of the bank granting this CC facility must be plated and hung in the premises of the stock of the Client.
- Periodic Inspection of stocks and businesses will be done by the bank like Stock audit, financial audit, compliance of returns to bank etc.
Difference between Overdraft and Cash Credit
Both Overdraft and Cash Credit are the method for the business people in borrowing money when there is a problem of sudden financial crises in working capital but both operate in a different way. Overdraft allows to withdraw money excess from the available credit balance meaning over withdrawing money from a current account of a person. Later the person pays the interest along with the withdraw amount to the bank. Overdraft is being done against a security like property, mutual funds and insurance policies, shares of the business or its owner.
Cash credit is also a source of borrowing money of fixed limit against movable assets of the company like stocks, debentures, receivables and inventories.
However, both are backed by proper collateral securities. In both cases, the sanctioned limit is renewed once in a year. The interest is charged on the basis of closing daily balance, which is an advantage to the businessmen.
Advantages of cash credit
- Cash credit is an excellent source for the business people to meet a sudden financial crises to continue the business without any stoppage.
- Only interest will be charged only on the amount withdrawn and not for the entire limit, which helps in lower interest costs.
- There is no EMI or monthly instalment payable. So, the Principal need not be repaid.
- Since the credit line is available, the businessmen can use it on any emergency. It will be a stand-by option.
- It is a temporary source of raising fund, which can be an alternative to Capital deployed, which helps business people to avail hassle free capital amount.
- It acts as a supporting hand for the business people to avail timely funds to run their day to day business activities.
In India, all public and private sector banks provide both Overdraft and Cash Credit options for businesses. These are named as Clean OD, Secured OD, Key Cash Credit, Open Cash Credit depending on the terms of usage and business needs, as fixed by the banks
Quikrupee helps clients in finding out the most apt and eligible lender and partners with the client end-end in their search and requirement of overdraft facility and cash credit facility.