Cash Credit is a type of short term loan facility in which the withdrawal of money by the company is not restricted to the amount the borrower holds in his cash credit account but up to a predefined limit. The cash credit account is functions like a current account with cheque book facility. Cash credits are more commonly offered for businesses than individuals
The facility is provided against pledge or hypothecation of stock i.e. raw materials, work in progress, finished goods, etc. or on the guarantee of book debts (debtors) or other collateral security as per banking company norms. The purpose of taking cash credit is to fulfill working capital requirement of the firm. The cash credit limit is supposed to be equal to the working capital requirement of the company less the margin funded by the company itself.
The drawing limit is specified by the bank or financial institution as well as it can vary from bank to bank and borrower to borrower. It is mostly 90% value of Liquid Collaterals. Interest is charged by the bank on the amount utilized not on the limit sanctioned. The bank has the right to demand money lent at any time.
Cash Credit is usually for a short period. That means, the limit is allowed for a period of 1 year and is renewed every year.