Definition and Purpose
- A Cash Credit Facility is a type of short-term loan provided by banks and financial institutions.
- It allows businesses to borrow funds up to a predetermined limit to meet their working capital requirements.
Key Features
- Flexibility: Borrowers can withdraw, repay, and re-borrow funds within the sanctioned limit.
- Short-term: Typically, the repayment tenure ranges from 30 days to 12 months.
- Collateral-based: Often secured by collateral, such as inventory, receivables, or property.
- Interest rates: Interest is charged only on the utilized amount, not the entire sanctioned limit.
- Repayment: Borrowers can repay the loan in installments or at the end of the tenure.
Benefits
- Easy access to funds: Quick and easy access to cash for meeting working capital requirements.
- Flexibility in repayment: Borrowers can repay the loan as per their cash flow.
- Interest savings: Interest is charged only on the utilized amount.
- Improved cash flow management: Helps businesses manage their cash flow more efficiently.
Eligibility Criteria
- Business vintage: Typically, businesses with a minimum vintage of 2-3 years are eligible.
- Credit score: A good credit score is essential for eligibility.
- Financial performance: Businesses with a stable financial performance and positive cash flow are preferred.
- Collateral: Availability of suitable collateral is necessary.
Documents Required
- Business registration documents: Certificate of Incorporation, Partnership Deed, etc.
- Financial statements: Balance sheet, profit and loss statement, etc.
- Tax returns: Income tax returns, GST returns, etc.
- Collateral documents: Property papers, inventory valuation reports, etc.
Types of Cash Credit Facilities
- Secured Cash Credit: Collateral-based cash credit facility.
- Unsecured Cash Credit: Non-collateral-based cash credit facility.
- Overdraft facility: A type of cash credit facility that allows borrowers to withdraw more than their account balance.
Interest Rates and Fees
- Interest rates: Varying interest rates, typically ranging from 10% to 20% per annum.
- Processing fees: One-time processing fees, typically ranging from 0.5% to 2% of the sanctioned limit.
- Other charges: Charges for documentation, collateral valuation, etc.