Short-term loans are a short-term source of financing for a business. As a result, a bank extends a short-term loan to a cash credit company. You can use your bank account to borrow up to a predefined amount. Companies can withdraw money from bank accounts without maintaining credit balances. They assess interest on amounts borrowed, not on borrowing limits.
Applying for a cash credit loan
The bank or lender looks at the current assets and liabilities of the business after the business submits a cash credit application. Generally, the bigger the business’s financial position, the bigger the amount of cash credit authorized. You can withdraw the cash credit facility as often as needed by the business.
Credit limit approval is not based on cash credit interest rate but on the borrowed amount. An applicant’s creditworthiness and the collateral submitted by the company determine the cash credit interest rate applied to withdrawals from the cash credit facility.
Why it is required
Any company’s activities include all aspects of production, sales, and receipts. Each of these activities needs a certain amount of cash. Similarly, You should use sales receipts to finance the upcoming production cycle and its associated activities. In reality, however, businesses may forced to give credit to customers and may not have the time to wait for receipts, etc.
For this reason, a business requires cash to run its activities daily, including paying salaries, rent, taxes, cash credit interest rate on loans, costs associated with storing goods, and many other obligations. Businesses can obtain cash credit loans to meet this cash requirement. Unsecured and secured loans are available.
Features of a cash credit
A borrowing limit is attached to cash credits based on the borrower’s creditworthiness. The company’s borrowing limit determines how much it can withdraw.
Running balance of interest
The cash credit interest rate charged on a cash credit account is only on the running balance, not on the total borrowing limit, unlike traditional debt financing methods such as loans.
Minimum commitment charge
Even if the borrower uses the credit available, there is a minimum charge for opening the account. Similarly, A typical clause in bank loan agreements requires borrowers to pay a minimum cash credit interest rate on an amount predetermined or withdrawn, depending on which is higher.
Collateral, such as stocks or fixed assets, is often used to secure credit.
The drawing power gets re-evaluated after 12 months for cash credit.
What are the advantages of a cash credit?
Financing source for working capital
As the company doesn’t have to worry about liquidity issues, cash credits are essential sources of working capital financing.
A bank can easily arrange this type of loan for you, assuming you have collateral to pledge and you determine its value easily.
Deposits of excess cash into a cash credit account can lower a company’s cash credit interest rate. Since withdrawals from the account made many times, up to the amount borrowed.
You can reduce the company’s tax burden because payments with cash credit interest rates are tax-deductible.
Due to the reduced cash credit interest rate charged on a cash credit, you reduce the borrowing costs of the borrower.
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