A cash credit facility (CC) is a short-term financing option provided by banks or financial institutions to businesses, allowing them to borrow funds to meet their working capital needs. It is primarily used by businesses to cover day-to-day expenses like purchasing inventory, paying suppliers, or managing operational costs. The facility is typically offered against the security of assets like inventory, receivables, or other business assets.

Key Features of Cash Credit Facility:

1. Credit Limit: The bank sets a pre-approved credit limit, which is the maximum amount the business can borrow. This limit is determined based on factors like the business's financial health, asset value, and creditworthiness.

2. Secured Loan: Cash credit is a secured loan, meaning the borrower must pledge assets such as inventory, accounts receivable, or fixed assets as collateral to access the credit.

3. Revolving Credit: Unlike traditional loans, a cash credit facility is a revolving credit line. This means the business can withdraw, repay, and borrow again within the credit limit, providing flexibility to manage cash flow.

4. Interest and Charges: Interest is charged only on the amount of money used (borrowed), not the entire credit limit. The interest rates on cash credit facilities are typically lower than those on unsecured loans. However, fees and penalties may apply if the limit is exceeded or payments are delayed.

5. Repayment Terms: Cash credit facilities are usually meant to be short-term, with repayment typically required on a regular basis (e.g., monthly). However, since it is a revolving facility, as long as the borrowed amount is repaid within the agreed terms, the business can continue to access the credit.

Advantages of a Cash Credit Facility:

• Flexibility: Businesses can borrow as needed up to the approved limit, providing flexibility in managing cash flow and working capital.
• Lower Interest Rates: Since it is secured by business assets, cash credit generally has lower interest rates compared to unsecured loans.
• Quick Access to Funds: The funds are readily available for urgent financial requirements, such as purchasing raw materials, paying salaries, or handling unexpected expenses.

Disadvantages of a Cash Credit Facility:

• Collateral Requirement: Businesses must provide collateral, which could include assets such as inventory or property.
• Potential for Over-Borrowing: If not managed carefully, businesses might borrow more than they can repay, leading to financial strain.
• Interest and Fees: While interest is charged only on the amount utilized, fees and interest can accumulate if the credit is used frequently or for prolonged periods.

In summary, a cash credit facility is an essential tool for businesses to manage their working capital needs, offering flexibility, lower interest rates, and easy access to funds, though it requires careful management to avoid potential financial issues.