Cash credit basics

There are various types of requirements for funds as far as businesses are concerned. This is true of all types of activities, be it a business conducted by a company or some activity undertaken by a proprietor. One such requirement is of short-term funds usually known as working capital requirements.

Any business activity is not conducted solely in cash but it also requires credit facilities . This means that every purchase or sale does not result in immediate payment, rather in most cases the cash will come after some point of time. Sales on credit will result in debtors while other receivables will give rise to an asset that will be received in the future. Similarly, when a purchase is made there will be creditors, and there might be some payments that a business has to make which will result in an outstanding. This along with the amount locked in stock and raw materials will make up the working capital requirement for a business.

There is a specific amount that will be locked up in stock and raw materials till the time the entire cycle is set wherein the various payments start coming in, and on the other side, the payments required to be made are also done. This amount varies across businesses, resulting in different working capital requirements.

These requirements are satisfied through the route of short-term facilities that also include cash credit. Banks offer this facility; they are termed as short-term facilities for funds because these represent a limit up to which a business can get funds. These are also in existence for a time period that will stretch up to a year after which it will have to be renewed. cash credit forms a very vital part of any business funding and most entities have such facilities that they can make use of. It performs the dual role of matching the needs of a business with the facilities and of proving cost effective in terms of the amount that the business will pay for the facilities.