Leveraging credit facilities is an excellent approach to further a company’s objectives, be it to finance working capital requirements or undertake expansion. To their rescue, the Indian financial sector provides an array of options in that regard, both for short-term and long-term purposes.
Cash credit is one such financing facility that companies can avail to fund its varying expenses. By using this option wisely, business owners can optimally capitalise on short-term opportunities and add more value to their growth potential.
Like any other financing option, it is essential to gain a proper understanding of cash credit, to use it to its best potential. But, one must also consider alternative financing solutions like invoice discounting service by KredX, to gain quick access to working capital, thereby accelerating growth.
It’s a short-term credit facility that financial institutions extend to various businesses. Through this option, companies can withdraw funds, without any credit balance up to a specified limit.
Companies can use the borrowed amount to meet a variety of expenditures, like buying raw materials, paying wages, mitigating inventory expenses, etc. Cash credit is a fairly common debt device, with which companies can mitigate their working capital requirements easily.
Companies can withdraw cash as many times as necessary from a cash credit account. However, as mentioned before, withdrawal is only allowed up to a specific limit. This limit is determined, based on a business’s creditworthiness, structure of short-term assets, and other liabilities.
Here are some of the essential features of this facility that one must know before availing it –
Financiers extend this facility against a collateral asset. Usually, this involves current assets like inventories and debtors. Thus, in case a business is unable to make good of its debt, financiers can choose to sell collateralised assets to recover its losses.
The limit provided to a business depends on the value of such collateral asset. Usually, financial institutions sanction 60% – 75% of the asset value as the cash credit limit. In this regard, an invoice discounting service fares better, since businesses can avail up to 85% of accounts receivables as a cash advance. Further, with KredX, businesses can avail funds via bill discounting within 24 – 72 hours*.
Alongside interest, a business needs to pay a minimum commitment charge towards maintaining a cash credit account. That’s because the financial institution needs to set aside a portion of its funds for such an arrangement.
The method of interest calculation is one of the unique features of this credit facility. Financiers calculate interest based on each day’s closing balance, and not on the sanctioned limit. Thus, the earlier a borrower can repay the amount, the less interest it has to shell out.
The credit limit that a borrower enjoys with such a facility is usually available for 12 months. After the lapse of such period, the financier has to revise the limit based on the account holder’s credit history. However, some financiers also re-evaluate this limit, every quarter.
A cash credit facility provides several advantages to a borrower, like –
A company can acquire funding quickly with the cash credit facility. There’s no need for additional documentation or verification, and the business can easily withdraw funds as per requirement.
Another crucial advantage of this credit facility is that financiers do not charge interest on the entire sanctioned amount, but simply on the amount utilised. This way, businesses can manage their costs better.
Borrowers can withdraw cash any number of times within the specified limit. Thus, through the cash credit facility, companies can mitigate their short-term expenses flexibly.
Learning the shortcomings of this facility is as necessary as knowing its benefits. They are –
A business has to bear the commitment charge, even when not utilising the facility. Usually, the financier levies up to 2% charge on the unutilised amount. This feature makes the option somewhat undesirable.
Interest rates on cash credit facilities are usually higher, compared to that of traditional loans. Along with the minimum commitment charge, this option can increase the overall cost of financing for a business.
Companies need to satisfy stringent eligibility criteria to secure the cash credit facility. Hence, all businesses may not be able to benefit from this option.
As an alternative, enterprises can mitigate their working capital requirements with KredX’s invoice discounting service. But, no matter which option a business chooses, it must conduct an extensive cost-profit analysis to arrive at the most beneficial conclusion.
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The specific eligibility criteria for cash credit facility vary across financiers. However, some of the common parameters include –
Some of the documents that the applicant needs to produce are –
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