Cash credit is a short-term loan that banks give to businesses. It helps them manage daily working capital needs. If a business needs to buy raw materials or pay bills, it can use cash credit to do that. The bank allows the business to withdraw money even if there’s no balance in the account. So, it works like a credit facility rather than a regular loan.You do not get the full loan amount in your account. The bank gives you a limit, and you can use money up to that limit whenever you need. You pay interest only on the amount you use, not the full limit. That makes it a flexible and useful loan option for many small and big companies.The cash credit interest rate is usually higher than term loans. But since it gives great flexibility, many businesses still prefer it.

What is Cash Credit?

Cash credit is a short-term loan that businesses use for working capital needs. It is not a fixed loan. Instead, the bank gives a credit limit based on the business’s needs and performance.The business can withdraw money from this limit at any time. It can also deposit back into the account whenever it has extra funds. The best part is that the business pays interest only on the amount it actually uses.

Banks provide cash credit against security like stocks, inventory, or company receivables. The credit limit depends on the value of the security and the past business performance.

This is ideal for businesses that face ups and downs in cash flow. For example, a shopkeeper who sells more in the festival season can use cash credit in slow months to pay salaries or buy products. It is a type of working capital loan that supports business cash flow. It is different from other loans. In most loans, banks give a lump sum amount. In cash credit, you get a credit limit that you can use many times.

This facility is mainly for businesses and not for personal use. The bank checks your account activity, credit score, and business needs before giving you this limit. It also asks for collateral like stock or receivables.

• It is a working capital loan.
• The bank gives a limit, not a lump sum.
• You can use it as needed and repay when able.
• Interest applies only on the used amount.
• Secured by assets like stock or receivables.
• Not suitable for long-term needs or personal use.

Cash credit helps keep business running smoothly. If used wisely, it can support growth without causing debt stress.

Features of Cash Credit

Cash credit has many special features. It is different from term loans and helps manage short-term needs better.Cash credit is a revolving credit facility. You can take money, repay, and take again—many times during the limit period. Usually, the period is one year, but it can be renewed.

1. Working Capital Purpose: Cash credit is not a personal loan. Banks give it only for business use. It helps meet short-term needs like buying raw materials, paying wages, and managing daily expenses.

2. Credit Limit, Not Lump Sum: In a term loan, banks give the full amount in one go. But in cash credit, the bank sets a credit limit. You can use the money as needed, any number of times, up to that limit.

3. Interest Only on Used Amount: One of the top benefits is that interest is charged only on the amount used, not the whole limit. This helps businesses save on interest costs.

Example: If your limit is ₹10 lakhs but you use only ₹3 lakhs, you pay interest only on ₹3 lakhs.

4. Collateral is Required: Banks need some security. You must give stock, inventory, or receivables as collateral. The value of this security decides your limit.

5. Separate Account: Banks open a separate cash credit account. You use it only for credit facility purposes, not like a normal current or savings account.

6. Flexible Usage: You can borrow and repay multiple times. There is no limit to the number of withdrawals or repayments, as long as it stays within your limit.

7. Short Tenure with Yearly Renewal: Cash credit is usually valid for 12 months. Banks review your account and business performance every year before renewing the limit.

8. Regular Monitoring by Bank: Banks keep a check on your stock levels, books of accounts, and financial performance. You must submit monthly or quarterly reports.

9. Higher Interest Rate: The cash credit interest rate is usually higher than long-term loans. But businesses still prefer it for its flexibility.

10. Not for Long-Term Needs: Cash credit is for short-term use only. You cannot use it for buying machinery or land. It’s meant for day-to-day business use.

Advantages of Cash Credit

Cash credit offers many benefits to businesses. It is a lifeline for those with cash flow problems. Let’s look at how it helps businesses work better. This facility supports both small and big businesses. The biggest advantage is interest saving. You pay interest only on the amount you use. That is not the case with term loans.

• Saves interest: No interest on unused limit.
• Flexible: Borrow and repay anytime.
• Supports working capital: Keeps business running in cash crunch.
• Revolving facility: One-time limit can be used many times.
• Easy renewal: If you use it well, banks renew the limit each year.
• Quick access: You don’t need to apply again and again.

Many businesses prefer cash credit over loans as it gives them control over how much and when to borrow. It also helps maintain good relations with suppliers and workers by ensuring timely payments. Example: A factory owner can use cash credit to buy raw materials even when customers delay payments. This keeps production going.

So, what is cash credit useful for? It helps avoid delays, keeps stock ready, and manages all short-term payments.

Disadvantages of Cash Credit

While cash credit is very useful, it also has some limits. You should know these before you choose it.Cash credit can become risky if not used properly. Some businesses take the full limit but do not repay on time. That leads to high interest and low credit scores.

• High interest rate: Cash credit interest rate is higher than term loans.
• Needs security: You must give stock or receivables as security.
• Bank monitoring: Banks check your books and inventory often.
• Short-term only: It does not help in long-term plans or large purchases.
• Chance of misuse: Some use it for non-business needs, which is risky.
• Frequent renewal: You must renew it every year. That needs paperwork and reviews.
  

Overdraft vs Cash Credit

Both overdraft and cash credit help in getting extra money when needed. But they are not the same. Let’s compare them.

Overdraft is mostly for individuals or small businesses. Banks allow you to spend more than what is in your account. It is a simple facility linked to your savings or current account.

Cash credit is for businesses. Banks give a separate limit and a separate account. It is based on your stock or bills receivable.

Feature	Overdraft	Cash Credit
Purpose	Personal or small business use	Business working capital
Account Type	Same as current/savings account	Separate cash credit account
Limit	Based on account or security	Based on stock or receivables
Interest	On used amount	On used amount
Paperwork	Minimal	More documentation
Renewal	Sometimes	Every year

If you are a small trader, overdraft is easy. If you are running a business, cash credit gives more freedom and higher limit.

Cash Credit Interest Rate

Banks decide cash credit interest rates based on many things. These include the business type, turnover, risk, and security given.Rates are usually floating. That means they can change as per RBI rules or bank policy. The average rate is around 10% to 14% per year. Cash credit interest rate is affected by following factors:

• Type of business: Stable businesses get lower rates.
• Credit score: Good score means better rate.
• Security value: Higher security gives better terms.
• Bank relationship: Old customers get better rates.

Some banks also charge processing fees and renewal fees. You should ask all charges before taking the facility.

Relevance to ACCA Syllabus

The ACCA syllabus includes financial management, financial reporting, and audit assurance where topics like cash credit are essential in analyzing working capital financing, short-term borrowing, and bank credit lines. Understanding how businesses manage liquidity through instruments like cash credit is a part of performance management, corporate finance, and audit analysis. It is especially relevant in Financial Management (FM) and Advanced Financial Management (AFM) papers.

 Cash Credit ACCA Questions

Q1. What type of account is maintained for a cash credit facility?
A) Personal savings account
B) General ledger account
C) Cash credit account
D) Escrow account
Ans: C) Cash credit account

Q2. What is a key condition for obtaining a cash credit facility from a bank?
A) Collateral like stock or receivables
B) A personal credit score above 700
C) Fixed deposit in same bank
D) Approval from shareholders
Ans: A) Collateral like stock or receivables

Q3. How is interest charged on a cash credit facility?
A) On total sanctioned amount
B) On daily balance regardless of usage
C) On the actual amount utilized
D) Flat fee charged monthly
Ans: C) On the actual amount utilized

Q4. Under financial reporting, how is a cash credit facility classified in the balance sheet?
A) Long-term loan
B) Non-current asset
C) Short-term borrowing
D) Trade payable
Ans: C) Short-term borrowing

Q5. Which financial management principle does cash credit most relate to?
A) Capital budgeting
B) Working capital management
C) Investment appraisal
D) Cost of capital
Ans: B) Working capital management

Relevance to US CMA Syllabus

In the US CMA syllabus, cash credit is relevant in areas like working capital management, short-term financing, and banking relationships. These are covered under Part 2: Strategic Financial Management, where managing liquidity through tools like cash credit is essential for effective treasury operations.

Cash Credit US CMA Questions

Q1. Cash credit helps businesses mainly with what financial activity?
A) Long-term asset purchase
B) Equity financing
C) Working capital needs
D) Tax planning
Ans: C) Working capital needs

Q2. What makes cash credit different from a term loan in financial planning?
A) It does not require approval
B) It is used for employee salaries
C) It has a fixed lump-sum disbursal
D) It allows revolving access within a limit
Ans: D) It allows revolving access within a limit

Q3. Which of the following is a benefit of cash credit for cost control?
A) Avoids the need for inventory
B) Interest is paid only on utilized funds
C) It removes the need for budgeting
D) It increases fixed asset base
Ans: B) Interest is paid only on utilized funds

Q4. Which key performance area in CMA does cash credit affect most?
A) Audit compliance
B) Cost analysis
C) Liquidity and risk management
D) Budget variance
Ans: C) Liquidity and risk management

Q5. What type of financing is cash credit best categorized under?
A) Venture capital
B) Long-term bonds
C) Trade credit
D) Bank short-term borrowing
Ans: D) Bank short-term borrowing

Relevance to US CPA Syllabus

In the US CPA Exam, especially under Financial Accounting and Reporting (FAR) and Business Environment and Concepts (BEC), understanding cash credit is vital for managing current liabilities and internal control over financing. CPA candidates need to analyze how such facilities impact the balance sheet and short-term obligations.

Cash Credit US CPA Questions

Q1. How is a cash credit facility reflected in a company’s books under GAAP?
A) As a deferred income
B) As a contingent liability
C) As a current liability
D) As a reserve fund
Ans: C) As a current liability

Q2. What type of financial instrument is cash credit considered under GAAP?
A) Equity
B) Long-term debt
C) Revolving short-term debt
D) Off-balance sheet item
Ans: C) Revolving short-term debt

Q3. Why must CPA auditors verify stock and receivables for a cash credit facility?
A) To calculate tax expense
B) To confirm compliance with legal standards
C) To validate collateral value for borrowing
D) To estimate goodwill
Ans: C) To validate collateral value for borrowing

Q4. Which control process is vital in cash credit management?
A) Cost allocation
B) Capital structure management
C) Bank reconciliation and collateral review
D) Market analysis
Ans: C) Bank reconciliation and collateral review

Q5. Cash credit primarily supports which financial objective?
A) Profit maximization
B) Asset revaluation
C) Short-term liquidity
D) Debt restructuring
Ans: C) Short-term liquidity

Relevance to CFA Syllabus

In the CFA curriculum, particularly in Corporate Finance, Financial Statement Analysis, and Equity Investments, knowledge of cash credit is vital. Analysts evaluate company liquidity, risk, and credit structure, and must understand how short-term instruments like cash credit impact cash flow and solvency ratios.

Cash Credit CFA Questions

Q1. What does cash credit affect the most in ratio analysis?
A) Return on equity
B) Inventory turnover
C) Current ratio and interest coverage
D) Net margin
Ans: C) Current ratio and interest coverage

Q2. In a financial model, how is cash credit treated in cash flow statement?
A) Investing activity
B) Financing activity
C) Operating activity
D) Not included
Ans: B) Financing activity

Q3. Which risk increases if a company overuses cash credit?
A) Operating risk
B) Liquidity risk
C) Currency risk
D) Inflation risk
Ans: B) Liquidity risk

Q4. Why is understanding cash credit key for equity valuation analysts?
A) It helps calculate shareholding
B) It adjusts for tax provisions
C) It reflects short-term debt exposure
D) It measures P/E ratio
Ans: C) It reflects short-term debt exposureQ5. What financial metric may decline due to heavy use of cash credit?
A) ROA
B) Quick ratio
C) Dividend payout
D) Days inventory outstanding
Ans: B) Quick ratio