Cash credit (CC) loans offered by financial institutions like banks and non-banking financial companies (NBFCs) in India are emerging as a popular alternative to traditional term loans for meeting working capital needs. Cash credit for businesses allows money to be drawn and repaid multiple times within the approved limit. This revolving credit nature offers applicants more flexibility compared to standard loans with fixed repayment schedules.

Cash credit loans offer advantages such as optimal asset leverage for higher credit limits, a simpler application process, and flexible repayment terms. This article discusses the key benefits of cash credit compared to traditional loans for Indian companies managing fluctuating working capital needs.

What is a Cash Credit Loan?

A cash credit loan is a short-term financing loan, known as a credit line loan, that gives applicants access to a set amount of money up to a predetermined limit.  Cash credit gives more flexibility in terms of how funds are used and repaid than typical term loans, which give the applicant a lump sum payment up front and predetermined instalments.

Fundamentally, cash credit functions similarly to a flexible line of credit, enabling you to take out money as needed up to the authorised level.  This eliminates the need for frequent loan applications and allows you to access cash whenever you need it.

Benefits of Cash Credit Facility Loans Over Regular Loans

Here are some of the major cash credit loan advantages when it is compared to regular loans:

1. Flexible Credit Facility

The main cash credit loan feature is that it acts as a flexible credit facility. Unlike a term loan, where the applicant gets a fixed amount to be repaid over a set tenure, a cash credit loan allows the drawing and repaying of money multiple times up to a prescribed limit. This gives applicants extra liquidity to meet working capital needs that tend to fluctuate over the course of the business.

2. Repayment Savings

Banks and NBFCs typically charge higher interest rates on cash credit loans than on other types of loans. This is because of the flexible and short nature of a loan. The interest is also charged only on the utilised amount, helping applicants save on interest payment.

3. Flexible Repayment Structure

Cash credits offer flexibility in the repayment structure. There is no fixed Equated Monthly Instalments (EMIs) involved. Applicants have the freedom to repay interest and principal as per business requirements and cash flows over the loan tenure. They can optimise repayments to manage cash flows efficiently. This also provides a liquidity cushion during lean seasons or temporary disruptions.

4. Simpler Application Process

The application process for cash credit loans is often streamlined, as these facilities are typically secured against business assets such as inventory or receivables. While documentation is required for asset evaluation, the process can be faster than applying for multiple term loans. This enables quicker appraisal and disbursals, meeting urgent working capital needs in a timely manner.

5. Higher Credit Limit

Since cash credits are secured loans, financial institutions can sanction higher credit limits based on the value and quality of the security pledged. This enhances the working capital capacity of companies as compared to unsecured loans with smaller approval limits. Applicants get access to larger credit facilities to scale up operations.

6. No End Use Restrictions

Cash credit loans provide applicants complete flexibility in the end use of credit taken, unlike loans for specific purposes. Cash Credit limits approved can be used for any valid business expense like procuring raw materials, paying salaries, and other operational expenses, as per the discretion and needs of the applicants. Loan providers impose no restrictions.

7. Collateral Coverage

Collateral requirements for cash credit loans depend on the lender’s policy and the risk assessment of the borrower. In some cases, the required collateral coverage may be lower than for other secured loans, allowing businesses to leverage their assets more efficiently. Banks or NBFCs can approve a certain percentage of the value of assets pledged as security. This enables optimal leverage of assets available to obtain higher working capital limits.

Conclusion

Cash credit loans help address many pain points and limitations posed by traditional term loans. The flexibility and quick access to liquidity offered by cash credit loans make them well-suited for addressing a variety of short-term business requirements. These facilities can help companies manage working capital needs more efficiently.

Similarly, the working capital loans provided by Shriram Finance function like cash credit facilities by offering flexible funding solutions that help businesses manage their day-to-day expenses effectively.

FAQs

How is a cash credit loan different from a traditional term loan?

A cash credit loan is a flexible, revolving credit facility where businesses can borrow up to a set limit as needed, paying interest only on the amount used. A traditional term loan provides a lump sum repaid in fixed instalments over a set period.

What are the main advantages of a cash credit loan?

Cash credit loans offer flexibility to withdraw funds as needed, higher interest costs since interest is paid only on the amount used, and easy access to funds for short-term business needs.

Who can apply for a cash credit facility?

Businesses, including small and medium enterprises, traders, manufacturers, or distributors, with a good credit history and stable financials, can apply for a cash credit facility.

Is collateral required for a cash credit loan?

Collateral, such as property, inventory, or receivables, is often required for a cash credit loan.

Can the cash credit limit be increased?

The cash credit limit can be increased, subject to approval, based on the business’s performance, repayment history, and the loan provider's assessment.

Is there a fixed repayment schedule in a cash credit loan?

There is no fixed repayment schedule; businesses can repay and borrow again within the limit, as long as interest is paid regularly and the account remains active.

Are there any hidden charges with cash credit loans?

Some cash credit loans may have charges like processing fees, renewal fees, or penalties for non-usage, which vary by lender and should be checked in the loan agreement.

How does a cash credit loan help improve business cash flow?

A cash credit loan provides quick access to funds for daily expenses, inventory purchases, or unexpected costs, helping businesses manage cash flow gaps effectively.