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4. Cash Credit / Working Capital Loan

 
Concept

A Cash Credit (CC) is a short-term source of financing for a company. In other words, cash credit is a short-term loan extended to a company by a bank. It enables a company to withdraw money from a bank account without keeping a credit balance. The account is limited to only borrowing up to the borrowing limit. Interest is charged on the amount borrowed. A cash credit loan is a cash loan given to a company to meet its working capital requirements. It is a short-term source of finance with a tenure of up to 12 months. The borrowing limit is decided on the basis of the applicant’s credit history or creditworthiness, which is based on the company’s structure of the current assets and liability.

 
Features

  • Borrowing Limit is determined by the creditworthiness of the borrower
  • Interest on running balance
  • Minimum commitment charge
  • Collateral security : credit is secured using stocks, fixed assets, or property
  • Credit period : Generally upto 12 months
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Advantages

  • Source of Working Capital finance
  • Minimal Documentation and Fast Processing
  • Flexibility in cash withdrawals
  • Tax Deductible
  • Interest Charged only on the amount utilized
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Disadvantages

  • High Rate of Interest

  • Minimum commitment charges

  • Difficulty in receiving as it depends on borrower’s Turnover, Accounts Receivable balance, expected performance and collateral security offered

  • Temporary source of finance