Operation cash credit guide

Cash credit is a short-term facility and it operates in a manner different than that of various other loans. The usual experience of a person availing credit facility is that a bank gives a fixed amount on which a fixed rate of interest is charged. There are conditions with regards to the repayment of the loan and hence the schedule has to be maintained. But the situation is completely different when it comes to a cash credit.

Cash credit comes with a limit. Cash credit limit is sanctioned for a specific period of time, usually a year. The entity to which the limit has been sanctioned can use the cash credit at any point during the time period and the specified rate of interest will be charged on the amount that is taken or used. The account which is called cash credit account can be operated like any other account. It means withdrawing money when there is a need and then putting back or depositing the amount when the specific figure is available.

One key factor in the entire cash credit process is that the money is repayable on call. There is no specific schedule for the repayment but if the bank feels so it can call back the money at any given point of time. Though this is rarely done in normal operation, knowing this point is vital because there has to be adequate preparation for this type of situation in case of an emergency.

Once the time period for the cash credit limit is over, the limit has to be renewed. This development usually affects two main factors. One is the limit allowed for the business for the cash credit. If the business is in expansion mode, it will require a higher limit for its operations. This new limit can be sanctioned by the submission of the necessary documents and details. The other factor is the rate of interest that is applicable on the cash credit. This has to be reviewed considering the overall market situation as well as the behaviour of the borrower over the last time period when he/she operated this facility.