CC Full Form

CC stands for Cash Credit. Cash Credit is a kind of short-term loan that is provided by banks to businesses that maintain regular inflow and outflow of cash for the smooth working of their business and financial needs. Cash credit is necessary to meet the working capital needs so that a business will not go short of money and resources.

Banks and financial institutions provide loans for different periods, like a person who needs a loan for their raw material purchases takes short-term loans and the scholars who take loans for their college fees could pay the amount in 2 to 3 years or more. That’s why their loan is considered an intermediate-term or medium-term loan, but sometimes medical students take the long-term loan. Mostly, car loans and home loans are considered long-term loans.

What is Cash Credit?

Cash credit is a type of short-term loan. It could be given for 12 months, after which the creditworthiness of the drawer is valuated again. Cash credit services are offered by financial institutions and banks. Typically, businesses take this loan when they fall short of funds and need money to buy raw materials, and machinery and build stock in factories for the future, to pay the ongoing debts. Sometimes business profits get slowed down when the situation of insufficient funds rises so to overcome that period business takes the benefit of cash credit due to which neither the production gets affected nor the supply and the revenue.

Example- Let's suppose there's a company X that produces intermediate goods to provide raw material to company Y. After making and supplying its final product, the payment gets struck until company Y sells its stock. Then, during this time, company X couldn't stop its operation, waiting for the payment. So here comes the concept of cash credit into the picture, which enables businesses to carry on their operations regardless of worrying about money.

Process of Cash Credit

The procedure of taking cash credit is very simple, but it just all depends on the bank or the financial institution from which you are taking this facility. There’s an eligibility criterion like at least 21 years of age (age limit varies from bank to bank) of the lender etc. Also, some documents are mandatory in the whole process, which the institution itself specifies. For taking cash credit, a person has to open his cash credit account in the bank to meet its working capital requirements. The limit of cash credit is decided based on creditworthiness, financial status, past performance, age, the income of the person, nature or value of security or collateral, type of the business, loan to value (LTV) ratio, etc. After studying all the matter and collecting papers and collateral, a bank offers cash credit to the person or a business.

How Interest Rate is Decided on Cash Credit?

Against cash credit, a borrower has to give interest to the bank. But unlike traditional loans, interest is charged on the current withdrawn amount rather than the entire credit limit. But today the rate of interest charged is relatively high also. Sometimes banks charge a minimum commission charge, either if the credit facility is used or not. If a person doesn’t use the facility after being sanctioned, then the bank will charge the minimum commitment fee. However, if a person uses the cash credit facility and withdraws the money from his account, then the amount of interest on the withdrawn money and minimum commitment charge is calculated and then banks charge whichever is higher.

Advantages of Taking Cash Credit

• Helpful for procuring temporary needs.
• Interest is tax-deductible, which means if you are paying a tax of 50,000 this year then your amount of interest could be deducted from the tax amount, thus reducing the tax to pay.
• Today various institutions are offering cash credit, thus there is no problem with the availability of lenders.

Disadvantages of Taking Cash Credit

• The rate of interest is generally higher as compared to overdraft facilities.
• Commitment charges on the unused balance are also charged.
• It has to be renewed after a certain time.