Cash Credit is a fund based facility that enables a business enterprise to carry on its day to day activities smoothly.
Purpose
The limit is for financing the purchase/holding of stocks of raw materials, work in process and finished products, and the credit period extended to customers.
Interest rate
The interest rate is decided on the basis of the risk profile of the borrower
Validity
The limit is ordinarily valid for a period of one year. Contractually, cash credit is a demand facility and the amount outstanding can be recalled at any time by the lender. However, in practice, unless there is a default or other violation of the agreed terms, the limit is continued and renewed; with enhancement, if justified.
Security
The primary security is a first charge by way of hypothecation of the assets that are created out of the limit – the stocks of raw materials, stocks in process, finished goods and sundry debtors. Lenders may also seek personal guarantee of the promoters and collateral security in the form of mortgage of property, etc.
Margin on Security
Margins on security could range from zero in the case of export credit limit to 25% for stocks and 40% for sundry debtors. There is nothing hard and fast, and margin may differ from lender to lender.
Forms
As a part of the overall cash credit limit, lenders also sanction sub-limits for discounting of bills of exchange drawn in favour of the borrower and export credit limits.
