Cash Credit
Yes, you are correct. Cash credit is indeed a form of short-term funding or loan provided by financial institutions, typically banks, to businesses. It is designed to help companies meet their working capital requirements and manage their day-to-day operations.
When a business obtains cash credit, it is granted a certain credit limit by the bank. The company can withdraw funds up to that limit as per its needs. Interest is charged only on the amount withdrawn, not on the entire credit limit. This makes cash credit a flexible form of financing, as businesses have access to funds whenever required and only pay interest on the utilized amount.
The credit limit for cash credit is determined by the financial institution based on various factors, including the company’s credit history, financial stability, repayment capacity, and collateral provided. Collateral such as property, inventory, or receivables may be required to secure the cash credit facility.
Features
Working capital management: Meeting short-term operational expenses such as inventory purchase, payment to suppliers, and wages.
Expansion and growth: Financing business expansion initiatives, such as opening new branches, increasing production capacity, or entering new markets.
Capital expenditure: Purchasing plant and machinery, equipment, or other assets necessary for business operations.
Raw material procurement: Buying raw materials required for production or manufacturing processes.
Hiring staff: Funding recruitment and training expenses for new employees.
Debt consolidation: Consolidating high-cost debt by using cash credit to pay off existing loans or credit lines.
