What Is Cash Credit? How It Works, Eligibility & How to Apply

For Indian businesses  from small traders to large manufacturers Cash Credit is the most widely used short-term borrowing facility. Unlike a term loan where you receive a lump sum, CC gives you a revolving credit line to draw as needed and repay when cash flows allow. This flexibility makes it invaluable for managing the gap between business expenses and receivables.

What Is Cash Credit (CC)?

Cash Credit is a secured, revolving credit facility extended by banks to businesses, typically against hypothecation of current assets — inventory (stock), book debts (debtors), or property. The bank sanctions a maximum credit limit; the business can withdraw any amount up to this limit and repay it as cash becomes available, then draw again.

The CC account functions like a current account with overdraft — the balance can be in credit (when business deposits exceed withdrawals) or in debit (when withdrawals exceed deposits). Interest is charged only on the daily debit balance, not on the entire sanctioned limit.

How Does Cash Credit Work?

Drawing Power (DP): The Key Concept

The Drawing Power is the actual amount you can withdraw at any point. It's calculated based on your current asset value and is typically lower than the sanctioned CC limit:

Drawing Power Formula:

DP = (% of Stock) + (% of Book Debts) – Creditors

Example: If a bank finances 75% of stock (₹40 lakh = ₹30 lakh DP) + 60% of debtors (₹20 lakh = ₹12 lakh DP) – creditors (₹5 lakh) = Drawing Power = ₹37 lakh even if the CC limit is ₹50 lakh.

Businesses must submit monthly stock statements to the bank, and the DP is revised accordingly. If stock decreases (seasonal business), the DP — and therefore the available CC limit — reduces proportionally.

Interest Calculation on Cash Credit

One of CC's biggest advantages is interest only on the amount utilised:

This makes CC significantly more cost-effective than a term loan where interest accrues on the entire disbursed amount regardless of utilisation.

Cash Credit vs Overdraft vs Working Capital Loan

Who Is Eligible for Cash Credit?

Cash Credit is available to:

• Sole Proprietors engaged in trading, manufacturing, or services
• Partnership Firms with established business operations
• Private and Public Limited Companies
• MSMEs (Micro, Small, Medium Enterprises) — often with priority sector lending benefits
• Traders and Retailers with verifiable stock and debtor base

Key eligibility criteria:

Documents Required for Cash Credit

Frequently Asked Questions (FAQs)

What is the difference between cash credit and working capital loan?

A: A cash credit is a revolving facility where you can draw and repay flexibly, with interest only on the amount used. A working capital term loan is a one-time disbursement repaid through fixed EMIs with interest on the full amount — more suitable for project-based working capital needs.

Is cash credit better than an overdraft?

A: Both charge interest only on the amount used. CC is secured against current assets (stock/debtors) and is specifically designed for trading/manufacturing businesses. OD is typically secured against fixed assets or FDs and is more common for professional/service businesses.

What is the typical CC interest rate in India?

Cash credit interest rates typically range from **10% to 16% p.a.** linked to the bank's MCLR (Marginal Cost of Lending Rate) or Repo-Rate-linked benchmarks. AU Small Finance Bank's business credit rates are competitive with small business-focused rates — contact the bank for current rates.

 Can a startup get a cash credit facility?

Typically, banks require 2–3 years of business vintage and filed ITRs for CC assessment. Startups with less than 2 years of history should explore MUDRA loans, startup credit under MSME schemes, or begin with a smaller secured OD against FD/property.

What happens if I exceed my Drawing Power?

 Drawings beyond your sanctioned DP are treated as 'irregular' the account becomes out of order. Banks may restrict further drawings and levy penal interest. If the account remains out of order for 90+ days, it's classified as NPA.