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CASH CREDIT (CC) ACCOUNT is the primary method in which banks lend money against the security of commodities and debt. It runs like a current account except that the money that can be withdrawn is not restricted to the amount deposited in the account. Instead, the account holder is permitted to withdraw a certain sum called “limit” or “credit facility” in excess of the amount deposited in the account.

Cash Credits are, in theory, payable on demand. These are, therefore, counter part of Demand Deposits of the banks.

 

                                                                                      Security

Cash Credit (CC) is granted against hypothecation of stock and assets such as raw materials, work-in-process, finished goods and stock-in-trade, including stores and spares.

 

                                                                           Features of Cash Credit

1. This loan is given to meet the working capital requirements of a business.
2. It is given against a collateral security.
3. Interest is generally charged only on the amount of loan taken by the customer and not on the amount of credit sanctioned.
4. This is a short-term loan with specified monthly/quarterly repayment structure as decided by the lender.
5. The applicant is allowed to withdraw the funds made available to him to meet the day to day working capital requirement by way of a running account.
6. A cheque book is issued in the name of the company and he can withdraw funds as per requirement
7. The applicant has the option to repay the loan as frequently as desired (daily/weekly), or as per the repayment, the structure is drawn by the lender.
8. Even individual applicants can avail this type of facility against their fixed deposits (as a loan) and save on interest.

This comes in handy when the applicant is in need of urgent funds and can’t liquidate the deposit made.

 

Advantages of Cash Credit

 

  • The biggest advantage of cash credit is that it helps in meeting day to day working capital requirement of the company or individual taking this facility and hence one does not has to worry about liquidity as it will be always there due to cash credit.

 

  • Another advantage of this credit is that it easy to get this source of financing from banks because there are lesser requirements as far as security and other formalities related to loan is concerned, also turnaround time is less as compared to other loans and hence borrower can get this facility very quickly if he or she has all the relevant documents with him or her.

 

  • Unlike other loans in case of this credit interest will be charged only on the amount which the borrower has withdrawn and not on full sanctioned amount and hence in a way it reduces the financing cost of the borrower.

 

 

 

Disadvantages of Cash Credit

  • Interest rate charged on this credit facility is higher as compared to other loans like housing loan, educational loan and vehicle loan and hence company or individual taking this facility has to pay higher interest rates resulting in extra financial burden on borrower.

 

  • Security in required in case of cash credit and hence companies which are having assets or cash flows can only apply for cash credit others will not able to get cash credit due to non availability of security.

 

  • It is not a permanent source of finance and it is only a temporary arrangement and hence one cannot rely on this credit facility for a long period of time.
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