Cash Credit

A short-term credit made by a bank to a business

Author: Andy Yan
Andy Yan
Andy Yan
Investment Banking | Corporate Development

Before deciding to pursue his MBA, Andy previously spent two years at Credit Suisse in Investment Banking, primarily working on M&A and IPO transactions. Prior to joining Credit Suisse, Andy was a Business Analyst Intern for Capital One and worked as an associate for Cambridge Realty Capital Companies.

Andy graduated from University of Chicago with a Bachelor of Arts in Economics and Statistics and is currently an MBA candidate at The University of Chicago Booth School of Business with a concentration in Analytical Finance.

Reviewed By: Rohan Arora
Rohan Arora
Rohan Arora
Investment Banking | Private Equity

Mr. Arora is an experienced private equity investment professional, with experience working across multiple markets. Rohan has a focus in particular on consumer and business services transactions and operational growth. Rohan has also worked at Evercore, where he also spent time in private equity advisory.

Rohan holds a BA (Hons., Scholar) in Economics and Management from Oxford University.

Last Updated:September 13, 2022

A Cash Credit (CC) is a short-term credit made by a bank to a business. It allows a business to withdraw funds from a bank account without maintaining a credit balance. Commercial banks have different borrowing limitations on the amount of cash available for loans for the firm.

CC is comparable to overdraft facilities, but they have important variances. Overdraft accounts enable consumers to hold negative amounts while avoiding high overdraft penalties. CC is more common in business and usually includes some type of collateral.

It is a short-term loan with a length of up to 12 months that can be renewed once the loan is completed. Only the amount borrowed is charged interest, not the overall borrowing (credit) limit. CC is simply a sort of working capital loan available to businesses.

It is credit granted to enterprises over their current account balance for a specified period. Businesses can borrow monies that are greater than their account balance up to the agreed-upon or permitted borrowing limit.

The bank will charge interest based on its criteria, and the parameters agreed upon by the borrower and the lender.

The following criteria determine the CC limit:

  1. Borrower's credit history

  2. Past track record

  3. Borrower's repayment capacity

  4. Borrower's necessary funds

  5. The company organization's existing assets and current liabilities

  6. Security or collateral is given for the CC facility

CC enables businesses to bridge the working capital gap and use the cash for the following purposes:

  1. Buying raw materials.

  2. Paying staff wages and electricity bills to hold commodities until they are sold

  3. Sales financing

How CC Works

CC is a secured type of line of credit since the bank requires collateral. In contrast to other types of credit, interest is imposed on the daily closing balance. As a result, CC is often extended to corporations rather than individuals.

The credit limit on the CC account is typically a proportion of the collateralized security's value. CC is a short-term borrowing option available to business customers.

If the customer's account is insufficiently funded, they can utilize the CC for ordinary banking transactions up to the credit limit. CC is also known as a cash reserve account, and it is an unsecured line of credit that functions similarly to overdraft protection.

CC is a component of the Line of Credit, allowing people and institutions to draw funds from the facility as needed. It usually has bigger overdraft limits and lowers actual interest rates on borrowed cash than an overdraft does.

Overdrafts can be obtained from an existing account, but CC can only be supplied after the establishment of a loan account. Business vintage, or the number of years the company has been in operation at the time of obtaining the CC, becomes a criterion.

Banks and credit unions typically demand a business customer to put up collateral in return for cash. This security might be a tangible asset like stock.

Key Characteristics

1. Borrowing limit - The borrowing limit of a CC is determined by the borrower's creditworthiness. Banks determine drawing capacity by reviewing book debts, inventories, and creditors, among other things.

It is based on the borrower's borrowing capability or creditworthiness. You may withdraw as many times as your loan permits.

2. Running balance interest - The interest paid is on the CC account's operating balance, not the overall borrowing limit. Therefore, returning funds to this account will save the entrepreneur a significant amount of money in interest charges. 

3. The bare minimum of a commitment price - A one-time cost for creating the loan account is included in the short-term loan. Banks typically include a clause mandating the borrower to pay a set amount of interest.

The minimum charge must be paid regardless of whether the loan amount is used or not. Depending on the policies of the bank/financial institution, the expenses may range from 0.5 percent to 2 percent.

For instance, if the charges are 1%, the total would be 1% of 0.14 million = $1,400.

4. Collateral liability - Credit is sometimes secured by collateral such as stocks, fixed assets, or property. A monetary credit facility is granted in exchange for security.

Securities can take the shape of stock, debts, and other immovable property as main security and fixed assets and other immovable property as collateral security.

5. Validity of the Credit Period - It is typically awarded for a maximum of 12 months before being re-evaluated. However, the maximum allowable is valid for one year, after which the assessment may occur every quarter in certain circumstances.

This would vary depending on the circumstances and would be defined by the policies of the various institutions.

Prepayment Fees and Limit

Banks have established severe guidelines for extending cash lending facilities to businesses. Its limit is determined by the borrower's need and the bank's agreement.

It is typically sanctioned for one year and is secured by the security of certain tangible assets or a personal guarantee.

Security of CC

It is a type of bank borrowing in which items are pledged or hypothecated as security.

Pledge, exactly what is it?

Its primary purpose is to transfer ownership of the pledged commodity to the lender. If the borrower fails to repay the loan, it assures debt collection. 

What is hypothecation?

Goods remain in the hands of the borrower under 'Hypothecation,' who agrees to give the lender custody of the commodities whenever the banker asks for them. When transferring possession is either difficult or impossible, hypothecation is utilized to put a charge on the asset.

Calculating Interest on a CC Account

To avoid paying interest charges, pay the complete bill amount when you receive the credit card bill/statement by the end of the credit-free period.

The following is a general formula for calculating credit card interest:

Days since the transaction date x Total amount owed x Monthly interest rate x 12 months

Cash Credit Loan Application Process

Once the application is filed, the bank or lender evaluates the business's current assets and liabilities and authorizes a CC limit.

Businesses can withdraw as many times as they wish from this CC facility. The interest is levied solely on the borrowed amount, not on the permitted credit limit.

Qualification for a Cash Term Loan

Any of the individuals listed below are eligible to use this service:

  • Individuals

  • Professionals and sole proprietors

  • Limited Liability Partnerships are a type of partnership firm.

  • Private limited companies and registered trusts

  • Cooperative Societies and Public Limited Companies

Required Documents for a Cash Term Loan

The documents required to utilize this service are largely KYC documentation, although there are a few more that prove the firm's kind and sustainability. The list of documents is provided below:

  1. Application for a Cash Term Loan (duly filled and signed)

  2. Address verification for the application using the PAN Card

  3. Account statements Photographs taken lately (minimum 6 months)

  4. Financial Statements

  5. Returns for GST (Goods & Services Tax) and ITR (Income Tax Return)

  6. Validation of a business

  7. Proof of business location

  8. Articles of Association and Partnership Deed/Memorandum, if relevant

  9. Information about collateral/security

  10. Existing loan and liability data

  11. GST Certificates

Accounting Approach

For accounting reasons, CC is recorded in current liabilities under the subhead "Short Term Loans" on the balance sheet. The bank that provides the CC facility establishes a current account in the name of the firm.

A CC account will always have a credit balance, represented by a "Cr." balance, but other conventional bank accounts will always have a debit balance, signified by a "Dr." balance. A CC facility is a type of short-term loan.

Pros & Cons Of Cash Credit

It is a short-term loan facility banks provide for collateral security that allows borrowers to withdraw money over their credit amount.

The following are some of the benefits and drawbacks of CC. Let us examine them.


  1. A CC is an essential form of working capital financing since it reduces the need for the company to be concerned about liquidity.

  2. If collateral security is available to be pledged, a bank can easily arrange it.

  3. Your credit cash loan interest is tax deductible. 

  4. Only the amount used or the minimum commitment price is subject to interest.

  5. A CC loan is an excellent source of capital that does not need the corporation to liquidate its assets.

  6. The most fundamental advantage of CC is the flexibility of deposits and withdrawals.

  7. It also motivates the borrower to collect from borrowers, which accelerates the cash cycle and has a disciplinary effect on both the debtors and the borrower.


  1. A loan on CC has a very high-interest rate, and it might be difficult for young businesses to secure.

  2. The loan must be extended under new terms and circumstances when it expires.

  3. The key downside is that the needed securities must be adequate, and this sufficiency must be checked regularly, increasing administrative work for the firm.

  4. The borrower receives a short-term loan based on his or her turnover, accounts receivable level, predicted performance, and collateral security provided. As a result, it might be difficult for new businesses to get in.

  5. Borrowers are subject to a minimum commitment charge regardless of whether the firm uses its CC or not.

Cash Credit vs. Overdraft

These are two forms of short-term lending available to consumers from financial organizations. The main distinction between various types of borrowing is how they are secured.

  1. CC is more common in business and usually includes some type of collateral. Account holders who use overdrafts can have a negative balance without paying a high overdraft fee.

  2. Overdraft accounts of various forms allow customers to hold negative amounts while avoiding high overdraft penalties.

  3. Overdrafts have a lower interest rate than CC, while CC has a higher interest rate than overdrafts.

  4. Overdraft based on financial statements and security deposits, CC based on stock volume and inventory.

  5. Final financial assistance CC is utilized to meet working cash needs. In overdraft, both commercial and non-commercial applications are possible.

Similarities between Cash Credit & Overdraft

  1. CC and overdraft are regarded as the two most important financial tools for meeting an individual's or company's short-term and long-term needs. Both of these items appear to be very similar yet different in several financial elements.

  2. In both circumstances, the loan limit/amount sanctioned stays set, and extra funds cannot be withdrawn.

  3. The lender's interest rate for CC and Overdraft is based on the amount of money used, not the sanctioned amount or limit.

  4. Both of these financial instruments are given in exchange for the security of existing assets.

  5. CC and overdraft are two prominent forms of company loans that need no paperwork.

  6. The CC limit and overdraft amount are repaid on demand.

Key Takeaways

Lenders charge lower interest rates on CC loans than on Overdraft facilities. If the borrower seeks to close the loan, certain lenders levy foreclosure fees.

Before creating a new account, you must review all of the additional and hidden fees made by the financial institution. CC has a set limit based on the hypothecation of stocks.

Borrowers must pay a percentage of the loan amount to terminate their accounts. Long-term finance is frequently available at low-interest rates, but short-term funding has higher interest rates.

Keep track of or compare the processing cost imposed by the lender, as it may differ from one bank to the next.


Researched and authored by Manal Fatima | LinkedIn

Reviewed and Edited by Aditya Salunke I LinkedIn

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