Growing organizations keep looking for working capital. Cash Credit is one of the most effective sources to address the need for working capital. Put in simple words; It is a facility that financial organizations offer to withdraw money without the compulsion to retain a specific credit balance. Businesses enjoying cash credit facilities can withdraw up to their borrowing amount.
The cash credit interest rates are usually towards the lower side. Hence, it is highly coveted as a short-term finance scheme. To get the maximum advantages from cash credit, you need to avail it with consideration. Paragraphs underneath shall discuss the key points to consider before availing cash credit facility.
For how long do you need the money?
First and foremost, you need to consider the purpose of taking the credit. Do you need it for supporting short-term financing needs, or are you looking to finance long-term resources?
Cash Credit comes within the category of micro credit. Thus, it is meant to support your short-term funding needs. So, if you need to finance any fixed assets of your business, you should never opt for this finance scheme. Therefore, you should take into account your business progression. It would be best if you considered how long you might need the fund. Remember, you need to repay the amount you withdraw from your account. Thus, the longer you retain the fund with you, you will be paying more interest towards the credit. As such, businesses should avail of cash credit for the shortest time and only for short-term funding needs.
The interest rate payable towards the credit
As obvious with any finance scheme, you should check the applicable interest on the cash credit facility. The better is your credit history; you can expect better deals in this regard. You will need to pay interest only when you withdraw money from this account. As such, you should opt for it only when you practically need it. Once your purpose gets served, try to make the repayment, even if partially, at its earliest possible. This way, you can control the cost paid as interest. It will help you to downsize the unproductive business expenses, eventually optimizing the business cash liquidity.
Secured or unsecured credit?
In some instances, financial organizations ask for collateral security towards the cash credit facility. While in other cases, your lender may not ask for such a pledge. If you have resources to pledge towards the cash credit, it is always a better option to opt for. It is for this reason that secured credit always involves lower interest rates. At the same time, when you put forward some security towards the credit, the prospective lender is likely to approve your application faster and allow higher credit limits. Thus, you can optimize your working capital.
The value-to-credit ratio
If you take secured cash credit, you should consider the ratio between the credit limit and the value of the security you pledge. You should avail of the facility only if the lender allows you a significant percentage of the resource value as the cash credit limit. However, a crucial determinant in this regard is your credit history. If you possess a good credit history, you can expect the highest credit limit as per the security value you offer.
The credit Period
It is equally important that you consider the credit period. Usually, a cash credit facility is rolled out for a year. On completion of this period, the lender will re-evaluate the case. On successful review, they are likely to renew the contract.
However, if the business is not much creditworthy before the lender, they will likely approve a lower credit period. You should rather not avail of the facility if the credit period is excessively short. It is for this reason that in such instances, your working capital needs may not get addressed.