What is Cash Credit?
A Cash Credit (CC) is a short-term source of financing for a company. In other words, a cash credit is a short-term loan extended to a company by a bank. It enables a company to withdraw money from a bank account without keeping a credit balance. The account is limited to only borrowing up to the borrowing limit. Also, interest is charged on the amount borrowed and not the borrowing limit. To learn more, check out CFI’s Credit Analyst Certification program.Important Features of Cash Credit
Borrowing limit
A cash credit comes with a borrowing limit determined by the creditworthiness of the borrower. A company can withdraw funds up to its established borrowing limit.
Interest on running balance
In contrast with other traditional debt financing methods such as loans, the interest charged is only on the running balance of the cash credit account and not on the total borrowing limit.
Minimum commitment charge
The short-term loan comes with a minimum charge for establishing the loan account regardless of whether the borrower utilizes the available credit. For example, banks typically include a clause that requires the borrower to pay a minimum amount of interest on a predetermined amount or the amount withdrawn, whichever is higher.
Collateral security
The credit is often secured using stocks, fixed assets, or property as collateral.
Credit period
Cash credit is typically given for a maximum period of 12 months, after which the drawing power is re-evaluated.
