Short-term finance extended by banks/financial institutions to business units is a Cash Credit Facility. Cash Credit Facility enables the business entity to withdraw the amount from their account without maintaining a credit balance. There will be a pre-determined limit up to which the entity will be allowed to withdraw the amount. The borrower is allowed to withdraw any number of times within the established limit. The funds deposited into the account will again be available for usage since the established limit gets replenished.
A business unit has to have a business plan along with proof of past performance before approaching a bank/financial institution for a cash credit limit. This is to give a fair knowledge about the standing of the business unit in the market and the movement of their products and services. If the proposal for the Cash Credit is approved, the bank/financial institution will set a pre-determined limit which will be based on the previous performance of the business, the estimated performance for the current year, and the projected performance for the next year. The lenders also consider the extent of achievement of sales in the previous year as well as the pro-rata achievement of sales for the current year. All this will be studied thoroughly only to decide whether the projected turnover of the business is a realistic one or a very ambitious one. The primary security for the Cash Credit Facility will be the hypothecation of the stocks and receivables of the business unit.
After a thorough study of the business performance, the banks/financial institutions will evaluate the limit that can be extended for a particular business unit. There will be one other factor that will determine the extent of funds available for the borrower month after month. The borrower will have to submit a stock and receivable statement every month, quarter, or half-year, as stipulated by the lender. A drawing power will be set for every month, quarter, or half-year based on the stock and receivable levels mentioned in the stock statements. The evaluation of the drawing power will be based on a calculation considering the stock and book debt level as per the stock statement. The formula for arriving at the drawing power is as mentioned below:
Stocks + Receivables (Age of the book debts accepted will be 90 days)
Less: Margin stipulated on stocks and receivables
Interest will be charged on the amount utilised. The limit will go down with withdrawals and will be replenished with deposits. The main advantage of a cash credit limit is that the borrower can keep control of the interest cost by depositing amounts whenever available. Since all the transactions will be routed through the cash credit account, any credits that come into the account will automatically replenish the limit and the interest will come down to that level.
The following are the differences between Cash Credit and Overdraft:
| Cash Credit | Overdraft |
|---|---|
| Withdrawal facility allowed against the hypothecation of stocks and receivables. | Withdrawal facility allowed more than the credit balance in the account. |
| The withdrawal limit is set based on the level of stocks and receivables. | Withdrawal facility allowed against securities like fixed deposit, LIC policy, shares, etc. |
| Concept of drawing limit, which depends on the extent of stock and receivables. Thus, the limit available will be fluctuating, but will be within the overall limit sanctioned for a particular borrower. | Limit once pre-set will be available to the same extent. No fluctuation in the level of funds available. |
| Separate Cash Credit Account will be opened and the transactions should be through the account. | The overdraft will be allowed in the current account. |
| Two categories of Cash Credit: Key Cash Credit and Open Cash Credit. | Two categories of Overdraft: Secured Overdraft and Unsecured Overdraft |
Details of Cash Credit Facility Offered by Top Banks
The facility will be extended to Manufacturers, Retailers, Distributors, Service Enterprises.
Eligibility:
Limit:
Value draw: Wherein the limit will be between 10 Lakhs and 25 Lakhs.
Elite draw: Wherein the limit will be for taking the business to greater heights. Quantum will be 25 Lakhs and above.
Security: Prime security of stocks and receivables. A wide range of collateral choice is available collateral security by way of mortgage of residential or commercial property.
Interest: Floating rate of interest linked to MCLR as decided by the bank from time to time.
Margin: As stipulated by the bank on case to case basis
Processing Charge: 1% of the limit or 7,500, whichever is higher. An upfront fee of 5,000 will be collected towards the legal report and valuation of the property offered as security prior to sanction of the facility. This administrative fee is non-refundable.
Renewal fee: 0.75% of the limit
Penal interest: 18% p.a. on the overdue amount for the overdue period. 2% over and above the normal rate of interest charged for the account will be levied for non-submission of stock/book debt statements.
Commitment charges:
ROC filing charges: 3,000 per filing, if done by the bank (collected only in the case of Pvt Ltd Companies).
Eligibility:
Limit:
Interest: As decided by the bank from time to time and linked to MCLR
Security:
Repayment: The tenability fixed for cash credit is normally 12 months subject to review annually.
Processing charges: Will be intimated on approval of the proposal for the cash credit limit.
Eligibility:
Purpose: To meet the working capital requirements of the business.
Limit: Need-based and depending on the profile of the company.
Margin:
Repayment: The cash credit limit will be set for 12 months and will be renewed every year.
Interest: As per the guidelines of the bank from time to time
Processing charges: Will be intimated at the time of sanction on case to case basis.
Eligibility:
Limit: A limit between 10 Lakhs to 3 Crores will be provided depending on the need and profile of the business.
Interest: As per bank guidelines from time to time
Security: Prime security by way of hypothecation of stocks and book debts. Collateral security by way of mortgage of land and building.
Repayment: Limit will be set for a period of 12 months and will be renewed on review every year.
Processing charges: As per the guidelines of the bank from time to time.
Commitment charges: Nil
Eligibility:
Quantum: Up to 10 Crores, depending on the requirement and company profile.
Interest: As per the guidelines of the bank from time to time
Security: Security of stocks and receivables not stipulated and no submission of stock/book statement required. Collateral security of residential/commercial property is required.
Repayment: The limit will be permitted for a period of 12 months and will be renewed further subject to annual review.
Processing charges: 350 per lakh with a maximum of 35 Lakhs.
The following self-attested documents are required for the Cash Credit Facility:
Cash Credit is a line of credit offered by banks/financial institutions based on the stocks, receivables level, and the projected turnover of the Unit. It is a revolving facility which will normally be provided for 12 months. It will thereafter be renewed on review of the performance for the previous year and current year till the date of renewal.
The difference between overdraft and Cash Credit Facility are:
Collateral security of residential/commercial property will be accepted.
All individuals, Proprietorship/Partnership firms, LLPs, Recognised Trusts and Societies, HUF who are manufacturers, retailers, distributors, and service providers, can apply for the Cash Credit Facility.
The normally accepted age of receivables/book debts is 90 days.
The Cash Credit Facility is given to take care of the working capital requirements/liquidity issues of the business units.
The Cash Credit Facility given is termed as short- term source and should be only for short term uses like building up inventory, paying trade creditors, etc. Investment for fixed assets should be done by long- term sources like term loans. The short- term source should be used for short term use only.