Cash Credit is a short-term credit facility offered by banks that allows businesses to borrow funds even when their current account has an insufficient balance. It is especially useful for managing day-to-day operational expenses like purchasing inventory, paying salaries, or covering delayed customer payments.
In India, the importance of such flexible funding is growing rapidly. As per recent industry insights, MSME credit touched nearly ₹35.2 lakh crore, with cash credit accounts forming a major part of this growth. This shows how essential such facilities have become for businesses that experience uneven cash flows.
Unlike a standard loan, Cash Credit offers a revolving limit. You borrow, repay, and borrow again, all within the same sanctioned limit. Read this blog to learn what cash credit means in more detail.
Table of Contents
Understanding Cash Credit
Cash Credit operates as a revolving credit line. The bank sets a borrowing limit based on the borrower’s business performance and security offered. Funds are withdrawn from a dedicated loan account, separate from the regular current account. The borrower pays interest only on the amount used, not on the entire sanctioned limit. This selective usage makes it more efficient than traditional loans, especially for businesses that do not need the full amount all the time.
Purpose of Cash Credit
Businesses use Cash Credit to deal with short-term operational requirements. Common use cases include:
- Stocking up on raw materials when prices are favorable
- Clearing supplier dues while waiting for client payments
- Managing payroll and utility bills in periods of low cash inflow
- Meeting sudden spikes in demand without delaying delivery
It works well for firms that experience fluctuating income cycles or face delays in receiving payments from customers.
How Does Cash Credit Work?
Once a bank approves a Cash Credit application, it assigns a specific credit limit. This limit is linked to a separate account from which the business can withdraw money as needed. Think of it like a refillable balance that the borrower can tap into without needing fresh approvals each time.
For instance, if the limit is 15 lakh but the business uses only 4 lakh, interest is charged solely on the 4 lakh. The rest of the limit remains available, without any cost. As funds are repaid into the account, the limit becomes available again, creating a cycle of usage and replenishment.
Key Features of Cash Credit Facility
Some of the defining characteristics of Cash Credit include:
- The tenure is usually one year, subject to annual renewal
- Interest is calculated only on the amount actually withdrawn
- A dedicated account is created for Cash Credit transactions
- It requires collateral, most commonly in the form of inventory or receivables
- Businesses can withdraw and repay any number of times, as long as they stay within the approved limit
This kind of arrangement gives companies the breathing space to manage expenses without waiting for payments to arrive.
Collateral Requirement
To qualify for a Cash Credit facility, businesses must pledge some form of working capital assets. These can include raw materials, finished goods, and customer receivables. Banks assess the value of this collateral before sanctioning the limit. The amount approved is generally a percentage of the total value of the pledged assets.
Maintaining regular stock reports and updated books of accounts helps in improving the chances of getting a favorable limit. If a business lacks sufficient assets to offer, it may consider alternatives like instant personal loans, though those are often more expensive.
Borrowing Limit
The credit limit for Cash Credit is not fixed arbitrarily. Banks take into account several parameters:
- Turnover trends over the past financial years
- Profitability and tax filings
- Repayment behavior on existing loans
- Value and liquidity of the pledged collateral
- Consistency in cash flow
Businesses with stable income and well-managed books generally receive better terms and higher limits.
Interest and Repayment Terms
Interest in Cash Credit is not charged on the entire sanctioned amount, only on the funds actually drawn. The rate is usually variable, linked to the bank’s base lending rate plus a margin. Calculation is done on a daily balance basis and collected either monthly or quarterly.
There are no fixed monthly instalments. Borrowers are expected to repay and reuse the facility depending on cash flow needs. However, many banks require the borrower to bring the loan account to zero at least once during the loan cycle to confirm that the credit is not being misused as a long-term loan.
Advantages of Cash Credit
Here is why Cash Credit is useful for business owners:
- Gives freedom to access funds only when needed
- Saves money by charging interest on actual usage, not the entire limit
- Reduces the need for taking multiple short-term loans for recurring expenses
- Acts as a working capital buffer without affecting the regular current account
- Provides yearly renewals based on business performance, avoiding fresh paperwork each time
Limitations of Cash Credit
Every financial tool has its limitations. Cash Credit is no different.
- The need for collateral can be a hurdle for new or service-based businesses
- Banks conduct periodic reviews that may lead to reduced limits
- Unused limits may still attract commitment charges in some cases
- Eligibility norms can be stringent, particularly for smaller firms
- It is not a substitute for long-term project funding
For businesses or individuals needing quick cash without extensive collateral, options like quick loans might be more appropriate.
Difference Between Cash Credit and Overdraft
Although both Cash Credit and Overdraft offer access to funds beyond the available bank balance, their structure and purpose are distinct.
Things to Consider Before Applying for Cash Credit
Before choosing Cash Credit, businesses should evaluate their readiness:
- Do you have physical stock or invoices to pledge as security?
- Are your account books and financials audit-ready and current?
- Can your cash flow support periodic repayments and balance resets?
- Do you understand the bank’s terms for reviews, usage caps, and interest computation?
- Will you need funds urgently, in which case emergency loans may be a better fit?
Being clear on these questions will ensure the facility serves your goals instead of becoming a financial burden.
Conclusion: Is Cash Credit Right for Your Business?
Cash Credit is a practical financing option for businesses that require ongoing access to capital without committing to large, fixed-term loans. It is best suited for situations where incoming payments are delayed but regular operational expenses must continue. However, responsible usage, timely repayments, and transparent reporting are essential to sustain this relationship with the bank.
Companies should assess their funding patterns, collateral capacity, and repayment discipline before opting for a Cash Credit facility. When used strategically, it offers the flexibility that growing businesses often need to remain stable and responsive to daily challenges.
