Cash Credit Limit (CC Limit) – Complete Guide
A Cash Credit Limit (CC Limit) is a short-term loan product that banks offer to companies, designed to assist with their working capital needs. It enables businesses to take out money, up to a previously agreed-upon amount, typically for one year. This helps them handle regular business costs like buying supplies, paying employee salaries, or settling utility bills.
What is Cash Credit Limit (CC Limit)?
A CC limit is a type of revolving credit, allowing a borrower to take out funds as required, up to a specified limit. The credit limit generally depends on the borrower’s borrowing capacity, which is assessed by considering the business’s net working capital, inventory, and accounts receivable.
In contrast to term loans, interest on a CC limit is only applied to the funds actually used, not the entire authorized limit.
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How Does CC Limit Work?
- Financial institutions evaluate a company’s financial condition and its need for operational funds.
- The borrowing capacity is determined by the worth of inventory, accounts receivable, and amounts owed.
- Companies can access funds up to the approved limit whenever they need.
- Interest accrues daily on the balance owed.
- Businesses pay back the borrowed amount when they have excess cash.
Key Features of CC Limit
- Use as needed: Take out money as you require, up to the agreed-upon amount.
- Interest: You only pay interest on the amount you’ve taken out, calculated daily.
- Duration: Usually up to a year, which can be extended based on the company’s performance.
- Protection: Securities like stocks, receivables, or collateral are commonly offered.
- Fees: Banks might apply a fee for not using the full credit limit.
CC Limit Interest Rate in India
The interest rate on CC limits generally ranges from 9% to 11% per annum depending on the borrower’s credit profile, bank policies, and collateral provided.
Interest calculation formula:
Interest = (Outstanding Amount × Annual Interest Rate × Number of Days) / 365
Advantages of CC Limit
- Repayment flexibility: Settle the debt when excess money is on hand.
- Economical: You only pay interest on the amount borrowed.
- Addresses immediate needs: Efficiently resolves shortfalls in working capital.
- Simplified renewal: Yearly limit extensions with little documentation.
- Strengthens banking ties: Facilitates future credit access.
Disadvantages of CC Limit
- It’s not meant for investments that last a long time or buying assets.
- Using it improperly could result in fines or a lowered limit.
- The available credit depends on existing inventory and what’s owed to you; it can change.
- Banks might impose fees if the credit line isn’t used enough.
Eligibility for Cash Credit Limit
To qualify for a CC limit, businesses usually need:
- Operating for a minimum of one year.
- Accurate financial reports (including audited statements, GST filings, and tax returns).
- Positive credit record.
- For small and medium-sized businesses, collateral-free credit lines are accessible through government programs such as CGTMSE.
How Does CC Limit Help Your Business?
A CC Limit ensures smooth cash flow by providing ready funds for operational expenses. It prevents cash crunches, allowing businesses to focus on growth without worrying about daily expenses. In many cases, an urgent short term loan can also serve a similar purpose — offering quick access to funds when your business needs immediate financial support.
Frequently Asked Questions about CC Limit
No, tax audit is not compulsory as per RBI guidelines, but banks may ask for financial documents during evaluation.
- CC Limit: Sanctioned based on business turnover and working capital.
- OD Limit: Typically secured against fixed deposits or collateral.
- DOD Limit: Term loan with fixed tenure and reducing balance.
Generally no, but MSMEs can avail collateral-free limits under specific government schemes.
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