Cash Credit Limit (CC Limit)
Cash Credit limit (CC Limit) is a facility offered by banks to Businesses to meet their short term working capital requirements. CC limit is a short term source of finance, CC limit holders offers Book Debts and Stocks as primary security to the bank. Its tenure is generally up to 12 months.
How to use CC Limit ?
The Limit is based on drawing power. The DP is the sum of net working capital desired into the business. CC Limit is allowed as per maximum permissible amount of borrowing from banks.
Uses of CC Limit are followings:
Purchase of raw materials, stores, fuel, etc.
Paying off wages of labour, Electricity charges etc
Financing the sales.
Payment of regular expenses of Business Operation.
On CC limit the interest is payable on the usage of funds. In other words the interest is payable as per following calculation:
No. of days x Outstanding amount x interest rate per month x 12 months) / 365
CC Limit against Security
Cash Credit limit is granted only for working capital needs & sometime banks extend higher limit on the perception exponential growth in business. Wherever such proposals are to be considered, bank are keen to seek additional collateral to safeguard against any contingency.
Aspects of Cash Credit Limits
It Depends on applicant borrowing power
Can withdraw any time up to the Limit
Interest is charged only on used amount not on the entire limit.
Minimum charges are charged by Bank as per Bank policy wherever Limit is underutilized.
It’s tenure is up to 12 months.
Advantages of CC Limit
The biggest advantage of CC limit facility is the repayment of money as & when surplus funds available. The interest is charged on daily balance outstanding so it ensures efficient utilization of resources.
Disadvantages of CC Limit
The disadvantage of CC limit is its short term nature. It can’t be utilized for long term investments or asset building expenditure because it is meant for fulfilling the shortfall gap in working capital.
Moreover CC limit is assessed only for 12 months needs & any mis-utilization attracts penalties so it should not be utilized for long term investments.
Is Tax Audit compulsory for Cash Credit Limit ?
No there is no such requirement for availing CC limit facility as per existing guidelines of RBI.
What is the difference between CC limit, OD limit & DOD limit ?
In terms of usage, all the three form of limits are same. However the CC limit is sanctioned on the basis of business turnover, The OD limit is sanctioned on the basis of collateral offered for the limit as security & DOD limit is sanctioned for longer tenure usually more than one year time period & it get reduced at the passage of every month or pre-decided interval so that at the end of the tenure it get fully exhausted.