Cash credit is a short-term financing source for businesses. It works similarly to an overdraft bank facility. It is an important financing source for businesses in managing their working capital requirements.
Unlike an overdraft, a cash credit facility requires collateral. The interest charges apply to the portion of credit utilized only.
Contrary to a traditional bank loan, the bank does not charge interest on fixed terms or the full borrowing limit. The cash credit limit approval works similarly to that of a secured loan.
Important Features of a Cash Credit Facility
The cash credit facility is usually awarded to corporate account holders. The working mechanism of cash credit works similarly to that of an overdraft facility.
1) Approval of Cash Credit
Banks appraise the cash credit application based on the creditworthiness of the borrower. Credit history, corporate profile, the value of collateral, and income sources play key roles in cash credit approval.
Once approved, borrowers do not require to maintain credit balances with banks, unlike other facilities.
2) Interest Charges and other Fees
Interest is charged only against the utilized amount from the facility. Interest rates are charged on daily rates.
Most banks also impose minimum interest rate charges regardless of utilization. There are also approval and processing fees with cash credits.
3) Collateral Value
Unlike an overdraft, banks require collateral as a pledge to approve the cash credit facility. Collateral can be an asset of the company, including assets, term deposits with banks, stocks, or any other valuable asset.
4) Cash Credit Term
Cash credits are short-term financing options ranging from one month to a maximum of twelve months.
Reputable and creditworthy borrowers can renew the cash credit facilities on rolling terms. Lenders also appraise the renewed collateral value at the time of renewal.
The borrowing limits and approval for the facility largely depend on the borrower’s creditworthiness.
Companies use the facility as a cash advance for managing the working capital requirements usually. It helps them smoothen the accounts payable and manage supplier relations.
The company will be settled against the cash in current assets and loan account in current liabilities.
Advantages of Cash Credit Facility
The biggest advantage of a cash credit resembles the name, as it helps maintain liquidity for any business.
Businesses often struggle to keep smooth relations with suppliers as they lack cash for payments.
Some key benefits of the cash credit facility include the following:
- It helps the business in managing the working capital requirements
- It improves the liquidity of the business
- It helps to improve supplier and trade relations.
- Cash credit is a flexible borrowing facility
- Businesses pay interest only on the utilized facility
- Banks approve the cash credit facility easily with collateral
- It reduces the tax burden as interest costs are tax-deductible expenses
Disadvantages of Cash Credit Facility
Having a drawing account with a cash credit facility improves the operational efficiency of the business. However, like any other loan facility, it also serves some limitations to the business.
- Interest rates charged with cash credit facilities are higher than other loans.
- It requires substantial and valuable assets to pledge as collateral
- The value of assets may deteriorate over time which can result in changing terms and interest costs
- Renewal of the facility is not automatic
- Banks often charge high service and processing fees with cash credit loans.
Cash credit provides an important liquidity solution to a business in the short term. The flexibility and availability of cash credit make it an easier option for many businesses.
Types of Institutions That Offer Cash Credit
Cash credit is an option offered by many institutions to provide customers with quick access to money.
These institutions can range from traditional banks and credit unions to more modern sources of financing. Below are 10 institutions that offer cash credit:
- Banks: Banks are the most common institution that provides cash credit access, typically through debit cards or lines of credit. Banks often have the most stringent requirements for borrowing and accessing money but can be a reliable source for long-term savings needs.
- Credit Unions: Credit unions are similar to banks in principle but generally provide more flexible terms for consumer loans and other forms of cash credit due to their non-profit status.
- Peer-to-Peer Lending Firms: Peer-to-peer (P2P) lending firms allow individuals or businesses to borrow money directly from lenders, who may be other individuals or businesses, without having to deal with financial institutions such as banks or credit unions. P2P lending firms can provide quick access to funds with reduced costs compared to traditional lenders.
- Online Loan Providers: There is a growing number of online loan providers that offer cash credits in the form of loans ranging from small amounts (even $100) up to significant sums over more extended periods at competitive interest rates compared to traditional lenders, making them a viable and attractive option if you need quick funds.
- Angel Investors: Angel investors are wealthy individuals who provide capital investments to startup companies in exchange for equity stakes in those companies and shares of profits after an investment round has been completed successfully. While these investments can take some time before they pay out, angel investors can potentially offer more considerable sums than some other options if looking for significant capital funding quickly with minimal paperwork required on both sides—the angel investor’s side as well as the recipient’s side—making it possible for a quick turnaround depending on how fast they move on this kind of deal and how complex it is expectedly within the industry dynamics between both parties involved.
- Cryptocurrency Exchanges: Cryptocurrency exchanges allow users to buy cryptocurrencies such as Bitcoin using regular currency like US dollars and then sell them when needed for cash credits in the form of virtual tokens known as “coins,” which can then be retrieved through an online wallet or converted back into USD when needed by transferring them back onto an exchange platform and withdrawing funds directly into a bank account.
- Auto Title Loans: Auto title loans involve borrowing against the value of one’s vehicle; customers can borrow money against their car’s market value – usually up 70% – while continuing to use it during a period upon payment agreement with the lender, while providing them with fast access cash credits within days. However, interest rates will likely be much higher than most other loan products as these loans are risky given that failure to repay timely could result in possession repossession of vehicles by lenders.
- Payday Loan Companies: Payday loan companies provide quick access cash credits against wages earned within two weeks period by just submitting proof certificate documents containing evidence indicating steady employment over the past three months along with proof of residence address documentation; however, these types of products are associated high fees as well interest rates fees that should be taken into consideration for decision-making process prior applying for this type product.
- Factoring Companies: Factoring companies allow businesses another way of obtaining short-term business financing by selling invoice receivables at a discounted rate in order exchange for lump sum payment upfront instead waiting for payments from customers until goods transactions have been made (usually 30–90 days); This type product requires deeper analysis taking into considerations amount discounting along daily interests paid which could considerably diminish available resources dedicated towards investing activities over predicted forecasted timeframe.
- Hedge Funds & Private Equity Firms: Hedge funds & private equity firms specialize in offering very high risk/return opportunities, including leveraging buyouts where publicly traded stocks bought below market value aiming to reevaluate upwards, resulting in repaying initial cost plus additional profits through series dividend paying activities; only accredited investors allowed participating hedge funds & private equity firms thus ordinary people don’t have direct access these types opportunities unless become large partner organization capable investing size required to capitalize returns generated investment activities undertaken related hedge fund & private equity deals successfully closed finalized.