A cash credit loan is a type of working capital loan for a company to meet its working capital requirements. The money can be withdrawn against the hypothecation of stocks and receivables. It can be availed either in the form of a secured loan or an unsecured loan. Cash credit has a loan repayment tenure of one year. In fact, the bank offers loans to an enterprise depending on the credit history of the applicant. However, businesses need to submit collateral or security to avail cash credit loans.
The business may use these funds for any overall operational expenses including raw material procurement, machinery purchase, overhead costs, paying off salaries, debt settlement, buying real estate, inventory costs, etc.
Advantages and Disadvantages of Cash Credit Loans
| Advantages | Disadvantages |
|---|---|
| No collateral required | Rate of Interest is High |
| No CIBIL score check is required | Lesser repayment period of 12 months |
| Interest paid is tax-deductible | Difficult to avail by Startups |
| Quick and easily accessible with flexibility | Used mainly to meet working capital requirements |
| Interest Rate on the withdrawn amount | Short-term Loan |
| Source of working capital financing | Minimum commitment charges |
| Easy arrangement | Difficulty in securing |
What are the Documents Required for a Cash Credit Loan?
- Duly filled application form
- Business Plan/Project Report
- Copy of PAN card
- Passport-sized photographs of the applicant
- Identity Proof: Passport, Driver’s License, Voter’s ID card
- Residence Proof: Voter’s ID card, Driving License, Passport, Ration Card, Telephone Bill
- Income Proof: Last 6 months’ bank statement along with last 3 years
- Audited financial documents
- Last 2 year’s ITR along with the current year’s GST returns
- Business Proof: Incorporation and sales tax registration certificates, rent agreement,
- Business address proof: Ownership proof, property papers, house tax documents, electricity bill
- Details of collateral or security to be submitted
- Details of existing loans and their repayment schedule
- Partnership deed and Memorandum of Articles (MoA)
- Valid Trade Licenses
- Certificate under the Shop Establishment Act
- Lastly, the GST registration certificate
Who can avail of a Cash Credit Loan?
Individuals, professionals, business entrepreneurs, companies, partnerships, sole proprietorships, limited liability partnerships (LLPs), cooperative societies, and registered trusts engaged in manufacturing, trading, and services categorized under MSME can avail the Cash Credit Facility.
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