How does a Cash Credit Loan work?

A cash credit loan is a type of working capital loan provided by banks or Non-banking Financial Companies (NBFCs) to business owners. Here are some key points about how it works:

• Purpose: It is generally used to meet a business's short-term and working capital needs, such as purchasing raw materials, paying salaries, meeting operating expenses, etc.
• Credit Limit: The bank or NBFC sets a credit limit for an applicant to withdraw money from the loan account. This limit is based on factors like business turnover, assets, credit history, etc.
• Interest: Interest is usually charged monthly on the amount utilised from the sanctioned limit, quite similar to a credit card.
• Repayment: The loan can be used multiple times without separate applications. The applicant only needs to pay interest on the outstanding balance. Typically, the principal needs to be repaid only when the loan tenure ends.
• Security: Banks or NBFCs usually obtain security in the form of stocks, book debts, or property before disbursing the loan. Some banks or NBFCs may offer overdraft facilities instead of security.
• Tenure: A cash credit loan is usually sanctioned for a period of 12 months, which can be renewed annually if the account is satisfactory.