Cash credit or Overdraft is a facility to withdraw money from a current bank account without having credit balance but limited to the extent of borrowing limit which is fixed by the commercial bank. The interest is only charged on the amount utilized from the account and not on the limit sanctioned.
To avail cash credit facility you require a security to be offered up as collateral on the account in exchange for cash. This security can be a tangible asset, such as stock, raw materials, or another commodity.
The borrowing limit is determined based on the drawing power of the borrower. Drawing power is calculated using book debts, inventories and creditors. You can withdraw and deposit funds any no. of times till your limit gets exhausted. Difference between Cash Credit and Overdraf
Any person who is self-employed is liable for availing this facility in the name of the business.
Credit should get stuck in your business, in terms of stock, debtors and creditors
Drawing power for this facility is calculated using these 3 terms.
Applicant should have a credit score above 750 to avail this facility.
Below are the features which will benefit you if you avail this loan
Cash credit loans are ideal for businesses who have trouble meeting their operational expenses. They can benefit by running a cash credit account for their working capital requirement.
Liquid security is just a primary security in terms of this facility but they also need a secondary security for getting secured against the limit sanctioned.
All lenders charge a processing fee on the loan amount. If you miss a scheduled payment to the lender, you may have to pay penal charges. Other charges like stock statement dealy charges, cheque bounce charges, etc. may vary from one lender to another.
Since this facility is offered on the basis of running credit, a good track record of loan repayment is necessary to get further benefits. Lenders review it every year and change the terms and conditions of the account as per the loan repayment record.
