Cash Credit Facility

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.

Cash Credit is basically a running account where withdrawals and deposits are simultaneously allowed. This facility will be available typically for a period of 12 months and thereafter will be made available only after a review of the conduct of the account and as well as the performance of the business unit in that particular financial year when the facility was extended.

In as Cash Credit Account, the interest is applied on the amount withdrawn and not on the established limit. This enables the borrower to keep control of the interest cost on loan. In other words, when in need the money can be withdrawn only to the extent required and when the funds are available, it can be deposited back. The interest will be applied for the amount withdrawn and for the period withdrawn. Interest will be applied on the daily balance in the account.

Cash Credit is generally secured by the stocks and receivables as the primary security and property as collateral security. Cash credit is normally to take care of the working capital requirements of the business. Though interest is charged on the amount withdrawn, commitment charges will be collected annually whether the limit is utilised or not. The commitment charges will be a percentage on the unutilised limit in the account. Some of the businesses are financially disciplined and they operate within a limit which they would have allocated for the operational expenses. In such cases, the limit established for their cash credit account will not be utilised fully. A commitment charge will be collected at a percentage on such unutilised amount. This is apart from the interest collected on the utilised amount.

The main advantages of a cash credit are that it is a good source of working capital finance for the company, which will take care of the liquidity issues. The cash credit arrangement will be easily available from the banks/financial institutions if collateral security with a good realisable value is available.

This short-term credit is made available by the banks/financial institutions based on the turnover of the business, the receivable level, and the projected performance for the next two years. If the business is doing well, then obtaining the Cash Credit Facility is a cakewalk. However, anytime during the years if the business performance goes down due to market fluctuations and the recovery of the situation cannot be foreseen for some time, it may become difficult for the renewal of such established limits. Under such circumstances, the banks/financial institutions may demand the repayment of the outstanding balance in the account. Since, working capital becomes payable on demand, the borrower has to make good the entire utilised funds when a demand is made by the lenders. This is the main disadvantage of a cash credit limit.

Operating a Cash Credit Limit

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 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 be determining 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 debts 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

Less: Creditors

Creditors Denote the Stock That is Purchased on Credit

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.

Difference between Cash Credit and Overdraft

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 deposits, 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

5 Top Banks Offering Cash Credit Facility

  • HDFC Bank
  • Canara Bank
  • Punjab National Bank
  • Axis Bank
  • Bank of Baroda

Details of Cash Credit Facility Offered by Top Banks

Name of the Bank Details of Cash Credit Facility

HDFC Bank

The facility will be extended to Manufacturers, Retailers, Distributors, Service Enterprises.

Eligibility:

  • Should be a HUF, Proprietorship/partnership firm, Private Ltd, or Public Ltd. Company.
  • Business vintage should be a minimum of 3 years and should be present in the same locality.
  • Relationship with the bank for at least the past 6 months.
  • Should have a sanctioned credit facility with another bank up to exposure of 1 Crore (this criterion is for OCC to business with a turnover above 7.50 Crores who will be given a limit of 25 Lakhs and above)
  • Should not be listed in RBI Defaulter's List/HDFC negative database list.
  • CIBIL database should not show the applicant as a defaulter.
  • The conduct of the account with the existing banker should be satisfactory.
  • Annual turnover should be up to 7.50 Crores for limits above 10 Lakhs.
  • Profit-making company for the last 2 years with a good Tangible Net Worth.

Limit:

  • The limit will be above 2 Lakhs and as per the profile and requirement of the company.
  • For companies with an annual turnover up to 7.50 Crores, there are two categories of cash credit 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:

  • Where the average utilisation of the limit is 60%, no charges will be collected.
  • For utilisation less than 60%, a fee of 0.50% p.a. on the difference between the average quarterly utilisation of 60% and actual utilisation will be collected.
  • Charges will be collected every quarter

 ROC filing charges: 3,000 per filing, if done by the bank (collected only in the case of Pvt Ltd Companies).

Canara Bank

Eligibility:

  • The limit will be made available to individuals, Partnership Firm, Proprietorship firm, Companies, etc.
  • The facility will be made available for the working capital requirements of the units.

Limit:

  • There are three methods of assessment of the limit Cash Budget Method, Turnover Method, and MPBF Method. The limits evaluated by the above methods will be fixed for each account.
  • The drawing limit will be based on the stocks, i.e., raw materials, work-in-process, finished goods, and receivables.
  • Wherever there are book debts arising out of genuine transactions with the Government Departments/ PSUs/Joint Stock Companies/firms of repute, cash credit can be given only against the book debts of a specific age.

Interest: As decided by the bank from time to time and linked to MCLR

Security:

  • Stocks and receivables will be the primary security and land, building, and other fixed assets of the firm/company will be collateral security.
  • Personal guarantee stipulated on a case to case basis

Repayment: The tenability fixed for cash credit is normally 12 months subject to review annually.

  • CGTMSE guarantee cover will be available subject to conditions.

Processing charges: Will be intimated on approval of the proposal for the cash credit limit.

Punjab National Bank

Eligibility:

  • Individuals, LLPs, Partnership, Proprietorship Firms, Registered Trusts and Co-operative Societies, involved in manufacturing and services categorised under MSME.
  • The qualification of the promoter in the service sector will be of prime importance.

Purpose: To meet the working capital requirements of the business.

Limit: Need-based and depending on the profile of the company.

Margin:

  • For limit up to 2 Lakhs: No margin
  • For a limit above 2 Lakhs, but less than 5 Lakhs: 20%
  • For a limit above 5 Lakhs: 25%

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.

 

Axis Bank

Eligibility:

  • All business entities, having a minimum business vintage of 3 years.
  • Minimum annual turnover of 30 Lakhs and a maximum turnover of 10 Lakhs.
  • Age of the promoter or the individual should be 21 years at the time of applying for the facility.
  • The office or the residence should be owned and if rented, should have been in the place of residence at least for a period of 12 months unless shifted to own residence.
  •  If the office is rented, then should have been in the same premises at least for a period of 24 months.
  • For an individual, the minimum annual income should be 2.5 Lakhs as per ITR for the last 2 years.
  • Non-individuals should have been making a cash profit of 3 Lakhs for the last 2 years.

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

Bank of Baroda

Eligibility:

  • Individuals, Proprietorship Firm, Partnership Firm, LLPs, Pvt. Ltd. Companies, Registered Co-operative Societies and Trusts, who are dealing with trading of goods and trading in goods not prohibited by law.
  • Professionals/ businessmen/ self-employed individuals who are in the business for at least a period of 3 years.
  • Minimum annual gross income should be 3 Lakhs for the last 3 years.
  • NRI with a valid Indian passport, with a business for a minimum of 2 years, and having a valid job contract for a minimum of 2 years in a foreign country. The minimum annual gross income required will be 5 Lakhs.

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.

Documents Required for Cash Credit Facility

The following self-attested documents are required for Cash Credit Facility:

  • The relevant completed and signed application form
  • Financial Statements (audited) for the last 2 years with the Auditor's report. Projected financial statements for the next financial year.
  • ITR of the Company and the Promoters for the last 2 years and GST Returns of the Company for the current year.
  • A certificate from the Chartered Accountant regarding existing credit facilities, if any
  • Bank account statement of the Company and the Promoters for the last 6 months
  • Loan account statements of the Company and the Promoters (where existing credit facilities are there) for the last 6 months to establish the repayment history of the Company as well as the Promoters.
  • If the borrower is a Limited Company, then the shareholding pattern, Articles of Association, and Memorandum of Association have to be provided.
  • Rating from external credit rating agencies like ICRA, CRISIL, etc.
  • If the borrower is a Partnership Firm, then Partnership deed has to be submitted
  • Copy of the Title deeds of the property offered as security
  • Address proof like the Aadhar Card, Driving Licence, Utility bills, or Voter's ID of the promoters
  • Photo ID proof like Aadhaar Card, Passport, Voter's ID, PAN Card, etc. of the Promoters
  • PAN Card of the Company/firm
  • Certificate under the Shop Establishment Act, GST Registration Certificate
  • Valid Trade Licences and permissions
  • Any other documents as required by individual banks from where you wish to avail the facility

Frequently Asked Questions

What is a 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.

What is the difference between Overdraft and Cash Credit Facility?

The difference between overdraft and Cash Credit Facility are:

  • The Cash Credit Facility is based on the projected turnover of the business and the stock and receivable levels. An overdraft facility is a withdrawal allowed in the current account beyond the credit balance in the account.
  • The Cash Credit Facility should be operated within the drawing power, which will be based on the stocks and inventory level as per the stock/book debt statements submitted every month. The DP can be above the sanctioned limit or above the sanctioned limit. Even if it is above the sanctioned limit, the operations should be restricted to the sanctioned limit, whereas if it is below the sanctioned limit, the operations should be restricted to the drawing power.
  • In the case of an overdraft, a limit will be fixed based on the various securities offered like the Fixed Deposit, LICP, etc., and it will not fluctuate.
  • A separate account will be opened for Cash Credit and the transactions should be through that account.
  • The overdraft limit will be fixed to the current account and can be operated through the existing current account.

What is the collateral security required for Cash Credit Account?

Collateral security of residential/commercial property will be accepted.

Who can apply for a Cash Credit Facility?

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.

What is the normally accepted age of receivables/book debts?

The normally accepted age of receivables/book debts is 90 days.

What is the purpose for which Cash Credit Facility is given?

The Cash Credit Facility is given to take care of the working capital requirements/liquidity issues of the business units.

Can the limit under the Cash Credit Facility be utilised for investment in fixed assets?

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.

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