Cash credit as the name suggests is a type of loan, but it is a short-term source of finance which is offered by banks to their customers. Under this facility bank give a loan up to certain limit against collateral security and the interest charged by the bank is only on the amount withdrawn by customer and not on full sanctioned amount. For example if you have cash credit limit of $50000 and you withdraw $10000 then interest will be charged by bank on $10000 and not on $50000. Given below are some of the advantages and disadvantages of cash credit –
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- Unlike other loans in case of this credit interest will be charged only on the amount which the borrower has withdrawn and not on full sanctioned amount and hence in a way it reduces the financing cost of the borrower.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.
As one can see from the above that this type of credit facility has advantages as well as disadvantages and any person thinking of taking this facility should carefully read above points and then decide whether to take the facility from bank or not