Successful businesses keep a close eye on the working capital and use it as a parameter to judge the business performance. It is calculated as the difference between current assets and liabilities. Working capital reflects the funds used in day-to-day trading operations. In case of a liquidity crunch, small businesses can opt for a quick loan facility like cash credit to enhance the working capital and fulfil urgent expenses.
Cash credit is a type of short-term working capital loan extended by financial institutions, which allows the borrowers to utilise money without holding a credit balance in an account.
Here, a borrower can withdraw funds up to a limit predetermined by the financial institution as per prior agreements. Interests will be charged only on the withdrawn sum and not on the total loan principal sanctioned.
A cash credit loan can be used to meet the working capital gap in situations such as the following:
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. 45 lakh as corpus amount, which can be used to meet the day-to-day requirements and expand operations and invest in new machinery.
The revolving credit feature is one of the most significant cash credit benefits. A financial institution charges interest only on the borrowed sum, and the company can repay the accrued interest as EMIs. Meanwhile, the principal sum can be repaid at the end of the loan tenor.
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 -
|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 purposes.|
|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|Interest rate on running balance||Lower than overdraft loans; only charged on the withdrawn sum.||The interest rate is comparatively higher than cash credit.|
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