OVERVIEW
Business organizations need funds in order to meet their monetary requirement. Funding provided by banks for this purpose can either be long term or short term. Nowadays individuals/entities choose short term loan facility, in the form of cash credit . Cash Credit is a type of facility provided by the bank or financial institution in which, a company can withdraw an amount more than what he holds to his credit against the security of stock.
Cash Credit is a type of short-term loan facility in which the withdrawal of money by the company is not restricted to the amount the borrower holds in his cash credit account but up to a predefined limit.
The cash credit account functions like a current account with cheque book facility. The facility is provided to pledge or hypothecation of stock i.e. raw materials, work in progress, finished goods, etc. or on the guarantee of book debts (debtors) or other collateral security as per banking company norms. The purpose of taking cash credit is to fulfil working capital requirement of the firm. The cash credit limit is supposed to be equal to the working capital requirement of the company less the margin funded by the company itself.
The drawing limit is specified by the bank or financial institution as well as it can vary from bank to bank and borrower to borrower. The bank charges interest on the amount utilised not on the limit sanctioned. The bank has the right to demand money lent at any time.