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Cash credit facility(CC) :

There are many ways to raise finance; Cash Credit is one of the many ways of raising finance.

Banks offer cash credit accounts to businesses to finance their "working capital" requirements (requirements to buy raw materials or "current assets", as opposed to machinery or buildings, which would be called "fixed assets"). The cash credit account is similar to current accounts as it is a running account (i.e., payable on demand) with cheque book facility.

The limit of the amount that can be withdrawn is sanctioned by the bank based on the business cycle of the client and the working capital gap and the drawing power of the client. This drawing power is determined, based on the stock and book debts statements submitted by the borrower at monthly intervals against the security by hypothecation of stock of commodities and/ or book debts.

The excess withdrawal of cash is made generally on demand from the customer and the customer has to pay interest on the excess amount he/she has withdrawn. The Cash Credit facility is quite useful to those businesses where cash payment like wages, transportation, cash purchases are to be made and the receivables are not realized in time.

Example: - say, XYZ Ltd needs ` 1,15,000 for payment to supplier of raw materials. Bank permits `1,00,000 per day as cash credit limit for this period. In this situation ABC Ltd can withdraw only `1,00,000. Interest also calculated on ` 1,00,000 on daily basic, not on ` 1,15,000. 

Characteristic of Cash Credit Facilities :

It’s one type of short period (more period than overdraft) finance or loan.
Cash Credit facility is a provision to create loan or advance or credit by lender (mainly bank or financial institute) to borrower (mainly business concern)
It’s used to fulfill working capital requirement which is needed to run trading operation in a business. Only   business concern can enjoy this facility. Working Capital = Current Assets – Current Liabilities.
Business concern can enjoy Cash Credit facility against Pledge or Hypothecation of stock, book debt as a security or guarantee of the finance
Advance is sanctioned & money transfer to Cash Credit account by Bank or Financial Institute.
Borrower can withdraw money from Cash Credit account within permissible amount fixed by Bank for specific period.
Borrower can’t withdraw total loan amount at a time.

Interest charged amount actually withdrawn in daily basic, not full loan amount. Bank can charge certain amount on portion of loan not used by business concern because bank can’t use cash credit sanctioned amount.

Bank is not funded total required working capital. Some portion of working capital is invested by the business entities himself & balance amount is supply by bank in way Cash Credit.

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