Frequently Asked Questions about Cash Credit Facility
A cash credit facility is a short-term loan provided by banks to businesses to meet their
working capital needs. It allows businesses to withdraw funds up to a pre-approved limit
against the security of stock and receivables.
Businesses of all sizes, including SMEs, MSMEs, and large enterprises, can avail of a cash
credit facility. Applicants must typically demonstrate a stable business history, good credit
score, and sufficient revenue.
Both cash credit and overdraft facilities provide short-term funding. However, a cash credit
facility is specifically meant for business working capital needs and is secured against
inventory and receivables. An overdraft facility, on the other hand, is generally linked to the
current account and can be used for personal or business purposes, often secured against
fixed deposits or other assets.
The cash credit limit is determined based on the value of the borrower’s inventory and
receivables, business turnover, creditworthiness, and the lender’s policies. Banks typically
conduct a thorough assessment of the business’s financial health before deciding on the
limit.
Interest rates on cash credit facilities vary depending on the lender, the borrower’s credit
profile, and market conditions. Generally, interest rates range from 10% to 16% per annum.
Interest is charged only on the amount utilized and for the duration it is used.
Common fees and charges include processing fees, renewal fees, documentation charges,
and commitment charges for unutilized limits. It is essential to review the bank’s fee
structure before availing of the facility.
Required documents typically include:
o Business registration documents (e.g., GST registration, business licenses)
o Financial statements (balance sheet, profit & loss statement)
o Bank statements (usually for the last 6-12 months)
o KYC documents of the business and its owners
o Income tax returns (usually for the last 2-3 years)
o Details of inventory and receivables
o Business registration documents (e.g., GST registration, business licenses)
o Financial statements (balance sheet, profit & loss statement)
o Bank statements (usually for the last 6-12 months)
o KYC documents of the business and its owners
o Income tax returns (usually for the last 2-3 years)
o Details of inventory and receivables
No, a cash credit facility is specifically meant for financing the working capital requirements
of a business, such as purchasing inventory, paying suppliers, and covering operational
expenses. It is not intended for long-term investments or personal expenses.
Exceeding the cash credit limit can result in penal charges and higher interest rates.
Additionally, transactions that exceed the limit may be declined, and continued excess usage
can negatively impact your credit score and relationship with the bank.
Cash credit facilities do not have fixed repayment terms like term loans. Instead, they are
revolving credit facilities where the borrower can deposit and withdraw funds as needed, up
to the approved limit. Interest is charged only on the amount utilized. However, the
borrower is expected to maintain adequate drawing power and manage the account within
the agreed limits.