Cash credit, Working Capital Loan

Cash credit and working capital loans are both financial tools designed to provide businesses with access to capital for their day-to-day operations and short-term financial needs.

both cash credit and working capital loans are essential financial tools for businesses to manage their short-term financial needs. Cash credit operates like a revolving line of credit with flexible usage, while working capital loans provide a fixed loan amount with structured repayment terms. The choice between the two depends on a business’s specific financial requirements and its creditworthiness.

Cash Credit:

1. Line of Credit: Cash credit is a financial arrangement offered by banks and financial institutions that provides businesses with a revolving line of credit, similar to a credit card.
2. Short-Term Financing: It is primarily used for short-term financing needs and is often employed to manage day-to-day operational expenses, such as purchasing inventory, paying salaries, or covering short-term liabilities.
3. Revolving Nature: Cash credit operates on a revolving basis, meaning businesses can borrow, repay, and reborrow funds within the approved credit limit as needed.
4. Interest on Utilized Amount: Interest is charged only on the amount of credit utilized by the business, not on the entire approved limit.
5. Collateral Requirement: Depending on the lender’s policies and the creditworthiness of the business, cash credit may require collateral or be offered as an unsecured facility.
6. Flexible Repayment: Repayment terms can be flexible, and businesses often make periodic payments based on their cash flow.

Working Capital Loan:

1. Purpose-Oriented: A working capital loan is specifically designed to address a company’s working capital needs, which include covering short-term liabilities, managing day-to-day expenses, and supporting growth.
2. Fixed Loan Amount: Unlike cash credit, working capital loans provide a fixed loan amount upfront, and businesses repay the loan in regular installments over a predetermined term.
3. Interest on Entire Loan: Interest is typically charged on the entire loan amount, regardless of how much of the loan is utilized.
4. Collateral Requirement: Working capital loans may be secured or unsecured, depending on the lender’s policies and the borrower’s creditworthiness.
5. Term-Length: These loans come with a defined repayment period, often ranging from a few months to a few years.
6. Structured Repayment: Borrowers make structured payments, which include both principal and interest, according to the agreed-upon repayment schedule.