What is cash credit?

2 min read

Working capital reflects the funds used in day-to-day trading operations. It is calculated as the difference between current assets and liabilities. In a liquidity crunch, small businesses can opt for a quick loan facility like cash credit, a type of short-term working capital loan extended by financial institutions, allowing borrowers to utilise money without holding a credit balance in an account.

A cash credit loan can be used to meet the working capital gap in situations such as the following:

  • Purchasing raw materials
  • Maintaining inventory
  • Paying salaries and rent
  • Storage and warehousing
  • Financing sales, etc.

Cash credit loans are crucial for companies in a financial crunch that want to meet the working capital gap. Financial institutions like Bajaj Finserv can offer up to Rs. 75 lakh as a corpus amount, which can be used to meet day-to-day requirements, expand operations, and invest in new machinery.

Cash credit vs overdraft

Usually, cash credit and overdraft are considered similar financial products as most of their features overlap. However, there are some points on which these products can be differentiated, as discussed below:

Factors

Cash credit

Overdraft

Tenor

Short term commitment

Long-term commitment

End-use

It can be used to meet the working capital requirements

It can be used for business and non-business requirements

Principal borrowing limit

The loan amount is based on inventory and stock volume

The loan amount is based on security deposits and financial statements

Interest rate on running balance

Lower than overdraft loans; only charged on the withdrawn sum

The interest rate is comparatively higher than cash credit

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