What is Cash Credit and How it Helps Businesses Acquire Quick Funds

Introduction
 

Running a business successfully requires a business owner to streamline their cash flow, ensure the business’s stability, and consistently increase its profits. In order to increase their companies’ profits, business owners must often spend money in the short term by investing in new equipment, purchasing raw material, or hiring new staff. Banks and financial institutions offer various financing options for business owners who wish to borrow money for the short term. Of all these options, cash credit loans are secure and effective options that help business owners fulfill all their business needs. 

What is cash credit?
 

A cash credit loan is a short-term loan offered by banks and financial institutions to companies in order to help them meet their working capital requirements. Banks assess the credit history and financial stability of businesses before approving their cash credit loan applications. If you are a business owner whose cash credit loan request has been approved by the bank, you can use it for various purposes like purchasing new machinery and business expansion. You can also use the cash credit loan amount to acquire raw material, hire new staff, and consolidate your debt.

Cash credit loans generally have a repayment period of up to 12 months. You can plan for the repayment of your loan in advance by choosing a loan that charges a comprehensive interest rate and by comparing various cash credit loans online before selecting the best one.  While signing up for a cash credit loan – given that this is a secured loan – you must also pledge collateral to access the amount. A cash credit loan differs from a personal loan since it is a secured loan unlike the latter. You can easily access your cash credit loan via a bank’s mobile banking app or internet banking services.

Features of cash credit loans
 

Here are the important features of cash credit loans that you must know –

• Cash credit loans are short-term loans: Cash credit loans can be repaid on a monthly or quarterly basis depending on the bank issuing the loan. They generally offer you a 12-month period to repay the loan.
  
  
• Their objective is to help companies manage their daily operations: Cash credit loans mainly offer working capital loans to companies to help them streamline their daily operations.
  
  
• The repayment procedure of cash credit loans is borrower-friendly: The interest rate is charged only on the amount withdrawn and not on the sanctioned credit limit.
  
  
• If you have a higher credit score, you can avail a higher credit limit: Banks check the business owner’s creditworthiness and the stability of their business while offering credit limit to the customer.
  
  
• Interest paid on cash credit loans is tax-deductible: Remember, that you must pay interest only on the amount that you use.

Cash credit loan interest rate

Eligibility criteria and documents required for cash credit loan

Here are the eligibility criteria and the documents required for you to sign up for a cash credit loan in 2024:

· Eligibility criteria for signing up for a cash credit loan

Please note that these are generic eligibility criteria followed by most banks and financial institutions. You must contact your bank to check if it requires you to fulfill any other criterion –

1. You must be at least 25 years old to sign up for a cash credit loan.
2. Some banks might require you to produce your company’s IT reports for the past year while applying for the loan.
3. You can apply for a cash credit loan if your business falls in one of the following categories – sole proprietorship, publicly traded companies, limited liability companies, and other entities.
4. Your company must have at least 3 years of business history to qualify for this loan.
5. You must pledge collateral to sign up for a cash credit loan.

· Documents required to sign up for a cash credit loan

You will require the following documents to sign up for a cash credit loan –

1. Certified financial statements by a CA
2. Other documents as asked by the bank
3. Bank statement for at least six months
4. IT reports dating back at least a year
5. Record of loan repayment (if applicable)
6. Evidence of collateral

How does the cash credit loan process work?
 

Here are the features of cash credit that can help you understand how it helps business owners access instant funds –

• You can use it as a source for borrowing working capital: Any new business that has a low profit margin can use a cash credit loan to meet its requirements. Cash is an important source of liquid money for most businesses and if you have a small business that needs cash, you can get it by signing up for a cash credit loan.
  
  
• You can easily sign up for a cash credit loan as a business owner: Thanks to internet banking and mobile banking services, customers can easily sign up for cash credit loans today. As an IDFC FIRST Bank customer, you can sign up for this loan directly through the IDFC FIRST Bank mobile banking app. Signing up for these loans requires minimum documentation and a quick application process. Remember that you have to pledge collateral  while signing up for a cash credit loan since these are secured loans.
  
  
• Banks offer flexible modes of accessing and repaying cash credit loans: Companies that opt for a cash credit loan can withdraw funds several times within the borrowing limits. They can also deposit excess cash to reduce their debt burden.
  
  
• Interest payments on cash credit loans can be claimed for tax deduction: The interest that you pay while repaying cash credit loans are tax deductible, and therefore, these loans help you reduce your company’s overall tax burden.
  
  
• The bank charges interest only on the amount used: Cash credit loans charge interest only on the amount used. This reduces your overall financing cost. In case a portion of the amount lent isn’t used, you must only pay the minimum commitment charges established beforehand.

Benefits of cash credit
 

Here are the key benefits of signing up for a cash credit loan –

• You can easily meet your working capital requirements.
• Cash credit loans are sanctioned easily since they are secured loans.
• You can benefit from the overdraft facility on cash credit loans.
• If you have a high credit score, you can get favourable terms on your interest rate and a higher credit limit.
• You only need to pay interest on the amount withdrawn.
• Repayment period can be monthly or quarterly.
• Banks help you manage your cash credit loan directly through their mobile banking apps. The IDFC FIRST Bank mobile banking app, for instance, helps you access your loan details in an instant.

How does cash credit help businesses?
 

If you are a business owner who wishes to grow their business over time, cash credit loans can help you in various ways –

• You can purchase raw materials: For certain businesses, a smooth functioning of daily operations depends on the availability of raw materials. You can purchase these raw materials using a cash credit loan.
  
  
• Cash credit loans can help you maintain inventory: You can easily keep your inventory fully stocked using the amount that you receive from a cash credit loan. Maintaining inventory is important as it has a direct impact on the daily operations of a business.
  
  
• You can pay salaries and rent: Using a cash credit loan, you can conveniently compensate your employees on time. You can also pay rent using this short-term loan.
  
  
• You can also finance sales using a cash credit loan: You can improvise the marketing and sales division of your business by using the funds availed via a cash credit loan to do so.

Conclusion
 

Cash credit loans are an excellent financial tool for businesses seeking short-term liquidity to manage daily operations and support growth. These loans offer flexibility, tax benefits, and a borrower-friendly repayment structure, making them a preferred choice for business owners. However, business owners may have specific financial needs based on their business or personal expenses. For individuals needs, IDFC FIRST Bank offers a range of credit cards with unique benefits on shopping, travel, entertainment, and lifestyle. You can choose an IDFC FIRST Bank credit card that suits your needs and enjoy low dynamic rates starting at just 0.75% per month.