Understanding Cash Credit (CC) in Business and Banking

Introduction

Businesses require consistent cash inflows to run their daily operations. Therefore, banks provide business owners with different loans to preserve their smooth operations. CC loans were created to help businesses maintain their working capital requirements. An in-depth look into the CC meaning describes CC as a line of credit provided to businesses and companies by banks that supports the organization’s instant cash requirements and purchase of assets. The customer can use these funds in routine financial transactions up to the mandated borrowing limit. The CC-linked accounts are unique as they do not keep credit balances, and interest is charged based on the amount used.

Features of CC 

There are several features of cash credit loans that business owners should be aware of. 

• The Funds’ Purpose

CC loans are aimed at meeting working capital requirements. The funds allocated in CC loans can be used to finance operational expenses such as raw material acquisition, debt settlement, overhead costs, and inventory costs, to name a few. 

• The Funds’ Distribution

Businesses with CC loans have running accounts with their lender allowing them to withdraw money without acquiring a credit balance. Furthermore, a cheque book linked to the CC loan account may be issued by the bank in the business’s name to ease the withdrawal of funds. 

• Borrowing Limit

The amount of cash made available to the company is limited to a specific borrowing limit. The bank analyses the business’ creditworthiness before lending. The extent of their suitability as borrowers determines the amount offered by the bank. 

• Collateral is a Requirement

Approval for this line of credit demands security in the form of collateral. Collateral security can take various forms, including stocks, fixed assets, raw materials, or property. Banks offer cash that tends to be less valuable than the collateral provided in exchange for the collateral. 

• Interest Charges

Unlike other loans, CC loans charge interest on the daily closing balance instead of the upper borrowing limit. This feature is unique as interest is usually levied on the maximum loan amount authorized by the bank.

• Credit Period

CC is a short-term loan. It is valid for up to 12 months. After this time, the borrower must repay the loan, and the lender can adjust the customer’s drawing power. 

• Loan Repayment

The lender decides the terms of repayment. Due to its short-term nature, the loan is commonly repaid after its maximum credit period ends. However, the lender may choose to set up a repayment structure. The applicant may be required to pay on a monthly or quarterly basis in this case. Still, if the borrower prefers, payments can be made daily or weekly or following the repayment structure. 

What are the criteria for the lenders to assess a business for a CC loan?

Cash credit is a loan like any other, and businesses have to prove their qualification. Banks share some eligibility criteria involved in the administration of CC loans. 

1. Most lenders have a minimum age limit of 25 years for business owners. However, this can vary. It is important to contact your preferred lender to confirm their age limit for CC loans.
2. The business vintage is scrutinized during the approval process. A business should be in operation for at least three years. Different lenders accept different vintages. Some companies offer CC loans to companies with a one-year business vintage.
3. The company type is also taken into consideration. The company type may be a limiting factor as it could restrict some companies from applying. Generally, proprietorship firms, partnership firms, publicly traded firms, limited liability firms, and others are approved for CC loans. Business owners should contact the lender to determine if their company is eligible for working capital loans.
4. Some lenders prefer companies that have filed tax returns for a minimum of one year and are willing to provide this proof during the application process.
5. Applicants must also provide security collateral which varies from stocks to assets. Assets include raw materials, inventory, and partially completed goods. Most lenders accept real estate properties as collateral.

Documents that business owners should provide for CC loan approval

Official documents are required to examine the legitimacy and eligibility of the business for a CC loan. Below is the documentation that the borrower should avail for consideration.

1. Financial statements that are certified by a chartered accountant (CA) accurately describe an organization’s financial position and cash flows. 
2. A bank account statement listing transactions made within a minimum of six months.
3. Tax returns for at least one year and obtained from a relevant tax authority.
4. Loan repayment record. This criterion only applies to businesses that have a loan history.
5. A legally legitimate proof-of-collateral letter detailing the specific nature of the collateral offered.

Business owners are advised to call the bank ahead of time to determine what documentation is needed for approval.

How can business owners apply for a CC loan?

Business owners have the option of applying online or visiting the bank personally. In both cases, they should have the necessary documents ready. 

Conclusion

Meaning of CC loans can be understood as a source of short-term finances for businesses. Businesses may frequently collaborate with banks to acquire financial assistance in loans. CC aids in sustaining consistent business growth and allowing businesses to keep up their day-to-day operations effortlessly. Cash credit can be a sustainable financial product for banks because it is a secured form of credit as applicants must provide collateral. Furthermore, numerous businesses can apply for cash credit loans. Their terms of eligibility are applicable in many businesses. Sometimes consumers confuse CC with overdraft loans. Although they seem similar, they are two completely different financial products.