What is Cash Credit Facility?
Cash credit loans are obtained for a duration of 1 year and the amount varies from person to person depending upon the person’s credibility in the past along with the structure of assets and liabilities of the company/business.
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Businesses are expanding at a fast pace and new start ups coming up everyday, however, these ventures also require capital and finances. To solve the problem of finances in the short term, cash credit loans come in handy. Cash credit loans are obtained for a duration of 1 year and the amount varies from person to person depending upon the person’s credibility in the past along with the structure of assets and liabilities of the company/business. Cash Credit facility is usually obtained by businesses and companies so as to satisfy their day to day expenses or working capital needs.
Under a cash credit loan, the person or business who has obtained this loan gets to avail the benefit of withdrawing more money than is actually present in their account. To obtain this type of loan you need to pledge a collateral security with the bank or hypothecation of stock. Also, the bank charges interest on the actual amount withdrawn in excess of the available balance. Once the Cash Credit facility is granted, the applicant can withdraw the excess funds through a running account by means of a cheque book issued by the bank in the name of the business/company.
Further, the repayment plan is determined by the Bank/lender i.e. whether the borrower needs to repay daily or weekly or monthly, etc.
Banks such as IDBI, Bank of India, HDFC amongst many others provide the facility to avail cash credit to businesses to finance their day to day expenses which include procurement of raw materials, stores, fuel, for payment of wages for labor, power charges, for storing goods till they are sold out, etc.
Sometimes cash credit loans are also referred to as overdraft because of both being payable on demand; the funds available for withdrawal are more than the available balance and both are a source of short term finances, however, there are two Key differences:
Firstly, cash credit facility can be availed by an individual who has a cash credit account with the bank however to avail the overdraft facility the individual would require a current account.
Also, to avail a cash credit facility you will be required to pledge a collateral security or hypothecation of stock whereas overdraft facility requires only fixed assets as security.
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