Maximizing Opportunities: Understanding Cash Credit Financing
A cash credit loan represents a short-term financial facility provided to businesses by financial institutions and mostly banks, to manage their everyday operational costs. The tenure of the cash credit loan is 12 months, it also comes with an option for renewal, and it serves as an important source of temporary funding for the business.
This form of financing operates on a secured basis, leveraging the borrower’s existing assets—like current account balances or inventory—as collateral. The lender establishes a credit line, enabling the borrower to draw funds when required, up to the predetermined limit. However, the interest amount arises solely on the utilized portion of the loan, rather than the entire credit line.
In general, businesses avail the cash credit loans to address urgent cash requirements, like procuring raw materials, meeting payroll obligations, or managing accidental expenses. The agility and adaptability of cash credit loans render them a favoured choice among businesses seeking expedited access to financial resources.
Key features of Cash Credit Loans:
Cash credit loans play an important role in facilitating smooth business operations for companies. Here are some of the key features of cash credit loans:
1. Loan Purpose:
Primarily, cash credit loans cater to companies’ working capital requirements, including procurement of raw materials, salary disbursements, and covering routine operational expenses.
2. Collateral:
These loans are secured, necessitating borrowers to pledge collateral such as raw materials, finished goods, or other inventory assets.
3. Interest Rate:
Typically, cash credit loans come with a repayment period of one year or less. Interest accrues solely on the utilized amount, rather than the entire sanctioned borrowing limit.
4. Borrowing Limit:
The borrowing limit is dependent solely upon the applicant’s credit history which in turn allows for multiple withdrawals up to the business threshold.
5. Repayment Term:
Another key point is that the Cash credit loans typically offer a repayment tenure of up to 12 months which is less comparatively. After this period is finished, borrowers have the option to renew the loan agreement with the lender if necessary.
Criteria for Loan Eligibility:
Understanding the requirements for obtaining a cash credit loan is important before initiating the process of application. Listed below are the eligibility criterias for the cash credit loans:
1. Age Requirement:
The minimum eligible age of the business owner applying for the cash credit loan should be not less than 25 years. However, it may vary from lender to lender.
2. Eligible Entities:
Establishments eligible for the cash credit loans are Business owners and partners, big and small companies, cooperative societies, MSMEs, sole proprietorships, and Limited Liability Partnerships (LLPs).
3. Business Tenure:
Generally the lenders expect the business to be in operation for a minimum period of 2-3 years.
4. Business Credit history:
The lender will always check the business’s credit score history and review its ability to repay the loan in the stipulated time.
5. Financial Documentation:
The business needs to provide financial statements such as balance sheets, profit and loss statements, and tax returns to the lenders for better clarity.
6. Collateral Requirement:
In certain instances, lenders may stipulate collateral, such as inventory or equipment, to be pledged as security against the loan amount.
7. Revenue and Cash Flow Analysis:
Integral to the eligibility assessment process is an evaluation of the business’s revenue streams and cash flow dynamics, enabling lenders to gauge its financial viability and repayment potential.
Required documents for loan application:
The documents required for a Cash Credit Loan may differ from lender to lender and on the borrower’s profile too. However, there are some basic documents required for this loan which are mentioned below:
1. Proof of Identity
An aadhaar card, photo ID and address proof are required for the identity proof, apart from that bank statement or electricity bill of the borrower or the business owner is essential.
2. Business Proof
The borrower needs to submit proof of the existence of the business with its license number, GST certificate, PAN card, etc.
3. Bank Statements
The loan application will also require documents like the latest bank statements, tax returns receipt, balance sheet and profit and loss statement.
4. Collateral Documents
Submitting the documents related to collateral such as property deeds, or proof of ownership is mandatory.
5. Business Profile & Details
The lender needs to share a proper business plan along with a detailed profile of the business, including its history, products or services offered.