What Is A Cash Credit Loan And How To Apply For It?

If you are running a business, wouldn’t it be good to have a financial product from which you can withdraw money for the day-to-day expenses of the business without the inconvenience of paperwork? This is where a cash credit loan could be extremely helpful. 

One important thing to understand here is that please do not confuse a cash credit loan with a cash loan. These are two separate financial products. A cash credit loan is only used for business purposes while a cash loan can be used for anything. In this blog, let’s explore everything you should know about cash credit loans.

What is a Cash Credit Loan?

A cash credit loan is a short-term loan product that is only provided to businesses. It aims to help them in their daily operating costs like buying raw materials and paying daily wages. The maximum tenure of this loan is usually 12 months.

Like a credit card, a cash credit loan also works like a line of credit. You will be given a credit limit and you can avail funds up to that amount at any point in time. Your credit line is replenished as and when you repay the loan amount. The interest would only be charged on the money withdrawn.

Cash credit loans come under the category of secured loans. This means that you would need to pledge an asset of your business like inventory, equipment, securities, etc.

Features of Cash Credit Loan

Loan Objective

Cash credit loans are only meant to help businesses with working capital requirements. This helps in the smooth running of business operations.

Line of Credit

A cash credit loan is a revolving credit facility. You can withdraw money from your predetermined credit limit.

Loans Without a Repayment Schedule

Unlike other types of loans like home loans and personal loans, cash credit loans do not have a fixed repayment schedule. There is a maximum tenure limit but other than that, borrowers can repay as per their convenience.

Secured Loans

Like home loans and car loans, cash credit loans are also secured loans. Businesses need to pledge collateral to use this credit product.

Cash Credit Loan Eligibility Criteria

The eligibility criteria help lenders to avoid fraudsters and defaulters. Lenders consider these factors to determine eligibility –

Business Repayment History

Lenders would check the company’s credit score and past loan details to see if the credit behaviour of the company has been responsible or not.

Type of Company

Lenders have different credit policies for different types of entities like sole proprietorships, cooperative societies, limited liability partnerships, etc.

Business Cash Flow and Revenue

To approve cash credit loans, lenders might ask for financial statements like profit and loss statements, tax returns and balance sheets to check how risky it is to extend the loan.

Also Read: Personal Loan Tax Benefits | Tax Deduction & Tax Exemption

Documents Required for Cash Credit Loan

In order to complete your loan application and give you the cash credit loan, banks and NBFCs would need documents to verify identity, assess creditworthiness, evaluate the business’ financial standing and comply with regulatory requirements.

Different lenders would ask for a different set of documents. You can check this on their websites. Here is a list of documents lenders usually ask for –

– Proof of business like the company’s PAN card or GST certificate.

– Financial statements like bank statements and balance sheets.

– Documents of the assets pledged against the cash credit loan.

– Business incorporation certificate.

– Any other document that the lender would need.

Cash Credit Interest Rate on Loan

Interest rate is one of the most important factors you should consider while choosing the lender as it could be a significant cost to your company.

Also, unlike a loan with fixed EMI tenure, the interest on this loan is charged on the outstanding balance of the loan. Most of the lenders in India charge between 8% to 20% per annum.

The interest rate offered to a business depends on many factors such as loan limit, nature of business, lender’s credit policy and business’ repayment history.

How to Apply for a Cash Credit Loan?

The process to apply for a cash credit loan would differ from lender to lender. Once you have compared the loan offers and finalised the lender, you would need to complete these steps to avail the loan –

– Read about the information and documents required by the lender and keep them ready.

– Complete the loan application form. You can do the same by visiting the lender’s office or by filling out the application for credit loans online on their website.

– Once you submit your details, the lender will evaluate your profile.
If you are approved for the cash credit loan, you will be given a loan limit.

– You can now withdraw as much money as your business needs from your credit limit.

Uses of Cash Credit Loans

You can use the money borrowed via cash credit loans for these business expenses –

1. New Equipment Purchase or Repair – In case you need money to buy a new machine or repair the existing one, you can get a cash credit loan and ensure that your business runs without any hindrance.

2. Buying Inventory – If you want to buy raw materials or other products in large quantities and need money for the same, you can use this credit facility.

3. Unanticipated Expenses – You can borrow money to take care of any unexpected business expense.

4. Other expenses like daily wages, rent, etc can also be covered using this loan.

Conclusion

You should definitely consider cash credit loans as one of the options for your planned and unplanned working capital expenses. Since it’s a secured loan, the cash credit interest rate levied would be less than unsecured loans. You can go through the loan offers of reputed lenders and choose the one that serves you the best.

If you want an even faster way to avail funds, you can download the Zype app and get a personal loan up to ₹5 lakhs in no time. You can complete the loan application process in less than 5 minutes and get loan approval in 60 seconds. Once you apply for the loan, the money will be credited to your account in less than 24 hours.