Cash credit is a type of short-term collateral that allows a borrower to withdraw funds up to a predetermined limit, based on the borrower's creditworthiness and financial standing. The borrower can withdraw and repay funds as needed, and interest is charged only on the amount borrowed and the period it is used. Cash credit is a revolving line of credit, which means that the borrower can use the funds repeatedly as long as they keep paying back the amount borrowed.
Cash credit is usually provided by banks to small and medium-sized businesses for meeting their working capital requirements. The credit limit is determined based on the borrower's cash flow and the nature of their business. Cash credit is a flexible financing option that can be used for various purposes such as purchasing raw materials, paying salaries, paying for rent or utilities, and meeting other short-term expenses.
WHO CAN AVAIL OF CASH CREDIT
Banks may have their own specific eligibility requirements, such as minimum turnover or profitability, industry-specific requirements, and other factors that they consider while evaluating the creditworthiness of the business. Below are the common criteria for cash credit,
Business entity: The business should be a registered entity, such as a sole proprietorship, partnership, or private limited company.
Age of business: The business should have a minimum operational history of at least 1-2 years, depending on the bank's policy.
Financial standing: The business should have a steady cash flow and a good credit rating. The bank will evaluate the financial statements of the business, such as the profit and loss statement, balance sheet, and cash flow statement, to assess its financial standing.
Collateral: The business may need to provide collateral in the form of assets or property to secure the credit.
Compliance with regulations: The business should comply with all the applicable laws and regulations, such as tax laws, labor laws, and environmental laws.
Purpose of financing: The credit is generally provided for meeting working capital requirements, such as purchasing raw materials, paying salaries, paying for rent or utilities, and meeting other short-term expenses.
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