What is Cash Credit Loan?
A cash credit is a short term loan facility on revolving basis given generally for one year in the beginning & renewable subject to satisfactory conduct of the a/c of the borrower year on year. Cash Credit Loan is the most important component of Working Capital finance.
The cash credit loan can be given by the bank only, as the assessment of the sanctioned limit of the cash credit loan is based primarily on Stocks & Book debts of the companies in MSME sector. In practice bank fund the capital invested in Stock & book debts to meet up the day-to-day cash requirement of the companies.
Cash Credit Loan Eligibility:
Certain criteria’s to be fulfilled by the companies to become eligible for availing the Cash Credit Loan Facility from the Banking system.
The borrower age should be min 21 & maximum 70 yrs as on the date applying for the Cash Credit loan facility.
The age or the continuity of the business should not be less than 3 years.
The company, propose to avail the cash Credit loan facility should be engaged in Manufacturing/Trading/distribution of goods & merchandise establishing & exhibiting the physical stock, the value of which is reflected in their balance Sheet.
Such Companies may include the value of Sundry Debtors to arrive at the requirement of Cash Credit Loan as per the cycle of credit extended to their customers or buyers as the case may be.
Some Banks insists either the Business/Manufacturing unit or the residential place of the borrower is owned.
Adequate & additional security in the form of Immovable property is asked by the Banks as Collateral security, the acceptability & location of which is solely dependent on Banks discretion & opinion to become eligible to avail the Cash credit loan facility.
Borrowers CIBIL Score should be as per the benchmark set by the Banker.
The conduct of the Current account so maintained in the bank should be satisfactory as would be decided by the banker.
The borrower is not involved in any litigation of serious nature and should not have any long pending claim from any Statutory Authorities.
Documents for Cash Credit Loan:
The requirement of documents depends on the constitution of the Company /firm/ Organization etc.
All valid KYC papers of Promoters/ Owners/ Directors/ Trustees etc. as the case May be.
Partnership Agreement (For Partnership Firm)
Memorandum & Article of Association. Board Resolution- for Pvt. Ltd. Cos
Resolution as per bylaws/society Registration clause Copy in Case of trust & Society.
Trade & other License from Local Authorities.
Last one year bank Statement in case Credit Loan to be availed from a bank other than the one where the Current Account is maintained. In such case the lender Bank May ask for Confidential report from the Existing Bank about the conduct of the existing Bank about the Conduct of the Account specially current Account maintained there at.
Last 2 Years audited Balance Sheet (Where ever Applicable)
Two Years Projected Balance Sheet & one Year Provisional for the Current Period Running.
Last 3 Years IT Return of the Business as Well as the of the Owners / Promoters.
Latest GST Return/ 3B etc.
Details of others Loan if any & their Sanction letter.
Details & valuation of the Property offered as Collateral Security.
List of sundry debtors & sundry creditors-duly signed by the owners.
At least 3 Months stock Statements (Including Current one) duly signed by the owners.
(In some Case both these Statements every month to be certified by a Chartered account)
This list is not exhaustive & besides these documents Bank may ask for any other documents /papers/agreement/licenses etc. depending on the characteristics of the business and their cyclic or seasonal requirement.
Moreover, the requirement of additional documents shall arise depending upon the constitution.
Cash Credit Loan Interest Rate:
The Rate of Interest on Cash credit loan generally depends on each & every banks MCLR (Marginal Cost of Lending rate). A bank can offer lower Rate of Interest Cash Credit Loan if it’s MCLR is very competitive.
Generally, now a days the Rate of Interest on Cash Credit Loan offered by Banks varies from 10.5 to 14.5 %. But Bank may consider lower rate of Interest if the Collateral security coverage is higher than the minimum requirement of the Banks.
How to Apply for Cash Credit Loan:
The borrower may approach the banker to availing cash credit loans in the following way.
In person presentation to the Bank Manager appraising about the requirement of cash credit loan.
After understanding the business model /performance & requirement, Bank may accept a formal request either applying through the prescribed form provided by the Bank along with all the documents mentioned above in the Para “Documents “as per the nature & constitution of the unit /company /firm etc. or the borrower may submit a write up furnishing the details of cash credit loan requirement as prescribed by the Bank.
Subsequent to that, Bank may ask for physical inspection of the business unit where the stocks are held and also the property to be mortgaged as Collateral Security if required by the Bank.
If the cash credit loan is sanctioned to the satisfaction of the Bank, the borrower is required to give the processing charges for the same.
On approval the Borrower need to execute agreement with the Bank and accept the Terms & Condition as mentioned in the sanctioned letter.
Post sanction bank disburse the amount in an account called Cash credit account where regular cash /Cheque withdrawal /payment through on line mode /NEFT/RTGS etc. & deposit cash or otherwise permitted.
But the borrower is restricted to pay to the Trade creditors /suppliers/Electricity bill/wages & salaries as per details submitted at the time of Cash credit Loan application.
Cash Credit VS Term Loan:
Cash credit Loan is a short term credit facility sanctioned by the banks to fund the day to day business expenditure on the basis of valuation of Stocks & Book debts of the company. The Cash Credit account is operated like business current account with regular payment & deposit facility.
The interest on cash credit loan facility is charged on the actual use of fund at the end of day with monthly rest. No fixed payment amount & tenure of repayment is there. Generally given for a period of one year renewable yearly basis but after servicing interest with proper conduct of account.
The cash Credit Loan is payable on demand & its use of fund can’t be to acquire any capital assets or Real estate property.
Term Loan is a long term credit facility allowed by banks to acquire capital Assets like Plant & Machinery/erection of factory sheds /import of specialized machinery & construction of long duration infra projects etc.
It has fixed payment schedule & tenor for amortization of the Loan in both fixed & floating rate regime.
Term loan a/c can’t be operated like regular cash Credit loan a/c with deposit & withdrawal facility.
Repayment of Term EMI schedule which need to be honored every month after a specified period of Moratorium (only interest to be serviced during this period.) say for 3 month or any period as would be decided by the bank. Term loan can’t be paid on demand and repayable after fixed time.
Cash Credit Loan in PSU Bank:
Any commercial Bank can give cash credit loan but PSU Banks are pioneer in giving cash credit loan. All the PSU Banks allows cash credit loan facility more realistically and the requirement of Margin & collateral security are quite flexible unlike Banks in Private sector.
The rate of Interest also much competitive & in lower side than banks in Pvt. sector.
Cash Credit Loan in India:
Cash credit Loan in India is a widely used & accepted credit support platform provided by almost all the PSU Banks & Banks in Private sector. In America & other developed Economies a somewhat similar variant of Cash Credit Loan with some other features like flexible & fixed tenure payment options are available. Some remarkable difference between Cash Credit Loan in India & other developed market I are:
Lenders Category: Only Banks are allowed to sanction Cash Credit Loans In India No NBFC are permitted by R.B.I.
The End Use of the Fund: For example Cash Credit Loan In India is allowed & sanctioned by Banks for funding the Operational Expenses which constitutes Working Capital Finance of the Business, not for acquiring any Capital Asset & other use, personal or other whatsoever.
Basis of Calculation: On the value of stock + Sundry Debtors by Indian Banks. For business operation loan or Cash Loan, Banks in those countries prefer Mortgaged Finance.
Business Vintage: Minimum 3 yrs. in India. From 6 months above business continuity in other developed countries.
Security: Cash Credit Loan amount generally is covered up to certain percentage, by additional security in the form of Immovable property or easy marketable Assets in India.
No such requirement in those countries for Cash Loan similar to Cash Credit Loan in India.
CREDIT Score /Rating: In India Banks generally accepts CIBIL score of minimum 750. A FICO score of 650 is accepted for such kind of loan in U S.
Advantage of Cash Credit Loan:
Some visible advantages of Cash Credit loans are:
Capital invested in Stocks & Book Debts (up to certain vintages) are unlocked and requirement of liquidity in the business is provided by the Banks.
Interest payment is on the basis of actual use plus minus of credit & debit in the Cash Credit Loan A/c on daily basis.
Bank generally stipulates Margin of the owner /promoters as low as 20% of the stock value & up to 180 days aging of Sundry creditors/ Bills Receivables.
In some Schemes like CGTMSE no Collateral is required for cash credit loan.
Cash Credit loan Account can be operated like regular current account with deposit & withdrawal facility.
This a finance of Working capital of the business with assured flow of fund as per limit sanctioned and has the facility of revolving credit with option of renewal on satisfactory conduct of the account.
Cash Credit Loan Calculation:
While calculating the quantum of cash Credit Loan, usually the formula used is
Stock Value (Max up to 80%) + Bills Receivables (Max up to 180 days vintage) + sundrey debtors (-) sundrey Creditors
Some banks may increase or decrease the margin value & age of Bills receivable as their internal guidelines & directives. It has to be noted that such figures arrived at, would be aligned & compared with the top line sales figure of the enterprise for deciding the actual amount of Cash Credit Loan to be sanctioned.
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