If you are running a business, you may come across situations where you need urgent credit, say ₹20 Lakh at short notice. However, not all at once but in irregular instalments: say ₹5 Lakh today, ₹8 Lakh next month and ₹7 Lakh in the third month.  

Taking a term loan of ₹20 Lakh may not work as you would have to pay interest on the full amount regardless of how much you use. In such scenarios, a cash credit loan will be more useful.  

It is a short-term borrowing facility where a bank sanctions a credit limit for your business. You can withdraw any amount up to that limit whenever you need it. Interest applies only on the amount that you have withdrawn. Most businesses use cash credit for the following purposes: 

• Working capital gaps between paying suppliers and collecting from customers. 
• Seasonal inventory buildup before peak sales periods. 
• Managing irregular payment cycles common in B2B businesses. 
• Covering operational expenses during slow revenue months. 

You can withdraw the amount you need and pay interest only on what you use, irrespective of what the bank has set as the credit limit. Furthermore, you can also repay that amount and start drawing from your loan account as many times as you want.  

You can better understand how the loan works with the below example: 

Suppose your bank sanctions a ₹25 lakh CC limit based on your business profile. You draw ₹10 Lakh when suppliers need payment. The bank calculates interest on ₹10 Lakh from the date of withdrawal. 

However, your customer pays you only ₹8 Lakh. You deposit it back to the bank. The outstanding amount now drops to ₹2 Lakh, on which the bank calculates the interest. 

Next week you need another ₹15 Lakh. You can withdraw the amount again as it is within the credit limit sanctioned by the bank. 

This revolving nature makes CC loans different from term loans where you get a lump sum and repay in fixed EMIs. 

The interest rates for the loan usually range from 9% to 14% p.a. depending on: 

• Bank type (PSU vs private vs NBFC) 
• Collateral offered 
• Business profile and turnover 
• Credit profile of the borrowers 

Additional charges: The lender usually levy the following fees and charges for the loan: 

• Processing fee: 0.5-1% of limit 
• Stock inspection fee: ₹2,000-5,000 per visit 
• Renewal fee: 0.25-0.5% annually 
• Non-utilisation charge: Some banks charge if average utilisation is very low 

However, the actual fees and charges may vary from one lender to another. 

It is usually secured in nature. Unsecured CC exists but with lower limits and higher rates. Most lenders ask for a property as collateral for limits above ₹25-50 Lakh.  

Primary security: Hypothecation of stock and receivables. Bank has first charge on inventory. 

• Collateral security: Often required. Can be: 
• Residential or commercial property 
• Fixed deposits 
• Personal guarantee of directors 

While the eligibility criteria for the loan varies from one lender to another, some of the common requirements are as follows: 

Financial Requirements 

• Minimum turnover: Most lenders require an annual turnover of ₹40 lakh to ₹1 crore. However, some PSU banks may accept lower turnover for small businesses. 
• Business vintage: At least 2-3 years of operations. Startups operating for less than 2 years rarely qualify for the loan. 
• Profitability: Businesses showing a net profit for the last 2 financial years have a better chance to qualify for the loan. 
• Credit score: 700+ CIBIL score for business owners or directors. You can check your credit score with Finnable before applying for the loan. 
• Current ratio: Banks usually check if the current assets of a business exceed its current liabilities. A ratio above 1.33 is typically required by lenders. 

Lenders sanctioning CC loans usually require their loan applicants to submit the following documents: 

Identity and business proof: 

• PAN of business and proprietor/directors 
• GST registration certificate 
• Shop and Establishment certificate or Udyam registration 
• Partnership deed or MOA/AOA for companies 

Financial documents: 

• Last 3 years audited financials (Balance Sheet, P&L) 
• Last 12 months bank statements 
• Stock statement (monthly format) 
• Receivables aging report 
• ITR for last 3 years 

Collateral documents: 

• Property papers if secured CC 
• Stock hypothecation agreement 

Flexibility and Revolving Credit Nature 

The biggest advantage? You get to use only what you need. A ₹50 lakh term loan means paying interest on ₹50 Lakh from day one. A ₹50 lakh CC limit means zero interest if you haven't drawn anything. 

Withdrawals and deposits happen any time through cheques, RTGS, or net banking. No pre-approval needed for each transaction within limit. 

This flexibility suits businesses with unpredictable cash flows. Textile exporters waiting for LC payments. Construction contractors with milestone-based billing. Manufacturers with lumpy raw material purchases. 

Interest Calculation and Repayment Terms 

Interest is calculated daily on actual outstanding balance. Banks usually charge interest every month. 

Example: 

Day 1-10: Outstanding ₹10 Lakh at 12% p.a. 

Interest = ₹10,00,000 × 12% × 10/365 = ₹3,288 

Day 11-20: Outstanding drops to ₹5 Lakh after deposit. 

Interest = ₹5,00,000 × 12% × 10/365 = ₹1,644 

Day 21-30: Outstanding ₹8 Lakh after new withdrawal. 

Interest = ₹8,00,000 × 12% × 10/365 = ₹2,630 

Monthly interest: ₹7,562 (not ₹10,000 if full ₹10 Lakh was borrowed throughout) 

No fixed EMI structure. Interest debited monthly. Principal repaid when you make deposits into the CC account. 

Working Capital Management 

CC loans align borrowing with business cycles. In case of festival season you can draw more for inventory buildup. Or if you have a post-season slowdown, you can reduce the outstanding amount as your stock sells. Quarterly GST payment due? Draw temporarily, repay when receivables come in. 

This alignment reduces interest costs significantly compared to keeping a fixed loan amount outstanding year-round. 

Step-by-Step Application Process 

Step 1: Choose your bank. Having an existing banking relationship helps. PSU banks often have lower rates. Private banks process faster. 

Step 2: Meet branch manager. Discuss your requirement and get preliminary feedback on eligibility. 

Step 3: Submit application form with all documents. Include last 3 years financials, bank statements, stock statements. 

Step 4: Bank conducts stock audit. They'll visit your premises to verify inventory. 

Step 5: Property valuation if secured CC. Legal verification of collateral documents. 

Step 6: Credit appraisal by bank's internal team. Takes 2-4 weeks typically. 

Step 7: Sanction letter issued. Review terms, interest rate, processing fee. 

Step 8: Execute loan documents and hypothecation agreement. 

Step 9: CC account activated. Start drawing as needed. 

Cash Credit Loan vs Overdraft  

Both allow flexible withdrawals. Key differences: