What is Cash Credit?
Cash credit is a short-term working capital facility offered by banks and financial institutions to businesses. It allows a business to withdraw funds up to a sanctioned limit, usually against the security of current assets such as stock, inventory, receivables, or sometimes other collateral.
Unlike a term loan, cash credit is not disbursed as one fixed amount with a fixed repayment schedule. It works more like a running account. The business can draw money when required, repay when collections come in, and use the facility again within the sanctioned limit.
For example:
• A distributor has to buy inventory before the festive season.
• Customer collections may come 30 to 60 days later.
• The distributor uses a cash credit limit to purchase stock.
• Once customers pay, the business deposits money back into the account.
• Interest is charged only on the amount used, not the entire approved limit.
This flexibility makes cash credit one of the most common working capital products for traders, manufacturers, distributors, and MSMEs.
How Cash Credit Works for Indian Businesses
A cash credit facility is usually sanctioned after the lender reviews the business financials, working capital cycle, stock levels, receivables, bank statements, repayment behaviour, and collateral quality. The bank sets a sanctioned limit, but the actual amount available for withdrawal may depend on the drawing power.
Drawing power is often calculated after applying a margin to eligible stock and receivables. For example, if a borrower has eligible stock and receivables of ₹1 crore and the bank applies a 25% margin, the drawing power may be lower than the gross asset value.
Typical features:
• Used for short-term working capital, not long-term expansion.
• Secured against inventory, receivables, or other assets.
• Interest is charged on the utilised balance.
• The account can be operated repeatedly within the sanctioned limit.
• Stock statements or book debt statements may need to be submitted regularly.
• The facility is usually reviewed or renewed periodically.
Cash credit gives businesses liquidity, but it also requires discipline. Overdrawing, poor stock reporting, weak collections, or irregular servicing can affect renewal and future credit access.
Cash Credit vs Term Loan vs Overdraft
Cash credit is often confused with term loans and overdrafts, but they serve different business needs.
Cash credit:
• Best for inventory and receivable-led working capital needs.
• Usually backed by stock, receivables, or current assets.
• Used repeatedly within the sanctioned limit.
• Interest is generally charged on the amount used.
Term loan:
• Best for fixed assets, expansion, machinery, or long-term projects.
• Disbursed as a lump sum.
• Repaid through EMIs or structured instalments.
• Interest applies to the outstanding principal.
Overdraft:
• Allows withdrawals beyond the account balance up to a limit.
• May be secured or unsecured depending on the bank product.
• Often used for shorter liquidity gaps.
Example:
A manufacturer with seasonal raw material purchases may prefer cash credit because the borrowing need rises and falls with production and sales. A manufacturer buying a new machine may prefer a term loan. A professional firm facing a temporary payment delay may use an overdraft.
The right choice depends on the purpose, repayment cycle, security available, and cost of borrowing.
Why Cash Credit Matters for Businesses
Cash credit matters because many businesses do not fail due to lack of demand. They struggle because cash inflows and cash outflows do not happen at the same time. Suppliers may need immediate payment, employees must be paid monthly, inventory must be purchased in advance, but customers may pay later.
Cash credit helps bridge this timing gap.
Why it is useful:
• Supports day-to-day working capital needs.
• Helps purchase inventory before sales happen.
• Reduces pressure during seasonal demand cycles.
• Gives flexibility compared to applying for a fresh loan repeatedly.
• Can improve supplier negotiations if the business can pay faster.
• Helps avoid missed business opportunities due to temporary cash shortage.
Common questions:
• Is cash credit a loan? Yes, but it works as a flexible working capital limit rather than a one-time term loan.
• Is interest charged on the full sanctioned limit? Usually no. Interest is charged on the amount actually used.
• Can every business get cash credit? Not automatically. Lenders assess financials, collateral, turnover, cash flow, and repayment history.
• Is cash credit suitable for long-term investments? No. It is mainly designed for short-term operating needs.
