Cash Credit: Benefits for SMEs and How It Works

Cash Credit Meaning

Cash credit is a short-term loan provided by banks to meet the working capital requirements of businesses. This flexible financing option allows businesses to withdraw cash even when there is no balance, up to an agreed limit.

Cash credit offers businesses the flexibility to withdraw cash using a credit card, even with no balance, up to the credit limit. Interest is charged only on the amount withdrawn, not on the entire credit limit.

Applying for Cash Credit is one of the best financing strategies to ensure stability, growth and efficient use of resources.

This facility is a great help for businesses in managing their cash flow and operational expenses more effectively.

This cash credit account to cover expenses the necessary expenses like :

·       Purchasing raw materials

·       Warehousing

·       Maintaining inventory

·       Financing sales

·       Paying salaries and rents

Benefits of cash credit card

The benefits of cash credit cards for SMEs (Small and Medium-sized Enterprises) include:

1. Flexible Access to Funds: Unlike other term loans, cash credit provides a revolving line of credit capital that businesses can withdraw from as needed. This flexibility is absolutely ideal for managing short-term cash flow needs.
2. Interest on Utilized Amount: Interest is charged only on the amount withdrawn and not on the entire credit limit. This makes cash credit a very cost-effective solution when compared to other traditional loans where interest is charged on the total loan amount.
3. Quick Access: Cash credit facilities are often easier and faster to access compared to equity financing, venture capital and even traditional loans that have lengthy approval processes.
4. No Need for Immediate Repayment: Unlike invoice financing or trade credit loans that are bound with fixed repayment schedules, cash credit allows businesses to repay and borrow repeatedly just as long as they stay within the credit limit.
5. Reduced Collateral Requirements:  Cash credit requires no collateral, making it very accessible to SMEs that may not have substantial assets.
6. Helps Maintain Equity: Unlike the equity financing option, cash credit does not dilute ownership of the business in any way. Owners retain their full control over the company.
7. Supports Operational Continuity: By providing a consistent source of working capital, cash credit helps in ensuring that businesses continue their operations without interruption, even during their periods of low cash flow.
8. Revolving Capital Credit: As businesses keep repaying the borrowed amount, the credit limit is restored which allows for their ongoing access to funds.
9. No Need for Profit Sharing: Unlike venture capital or angel investment options, cash credit does not require any profit sharing or giving up a portion of business profits.
10. Builds Creditworthiness: Proper management and timely repayment of cash credit thus help build the business's credit history, making it easier for them to access other forms of financing in the future.
11. Lower Administrative Burden: Compared to crowdfunding and government grant options that often require significant time and effort in preparing and managing, cash credit typically involves less administrative overhead once it is established.
12. Short-Term Funding: Cash Credit thus is ideal for meeting short-term financial needs without committing to long-term debt.

These advantages ensure SMEs manage their financial needs more efficiently and support business growth.

Special features of  SBI Cash credit for SMEs

SBI Cash credit with its core mission to support small enterprises by easing processes make it a valuable option for SMEs.

Let’s see are some key features:

•       Included Segment: All micro-enterprises, SMEs, SSI units, SBF, Retail Traders, village industries, tiny units, professionals, self-employed and also the MSME Units.
•     Purpose: To help meet any kind of credit requirements which includes the purchase of a shop.
•   Eligibility criteria:

Cash credits are for SBI customers of the included segments with a satisfactory track record of at least 2 years.

SBI also has a scoring model system wherein the units that obtain a minimum of 60% as per their model qualify for the product.

•     Quantum of cash credit loan: Max up to 10lakhs

•       Processing Fees: There is as such no unified upfront fees only unified processing fee of 1000

·   Special key features:

Ø  Nil collateral

Ø  All loans are covered under CGFMU as under the Mudra Scheme. However, the accounts which are already open and the fees are being paid under CGTMSE will be continued.

·   Assessment of limit

Working capital: 20% of turnover of the last 12 months through the account.

For Self-employed and Professionals: 50% of Gross annual income as declared in their income tax returns.

•   Repayment Method: Cash Credit is repayable on demand.
•       Validity: 3 years or subject to annual review

Borrower’s margin:

• Upto 50,000: Nil
•   50,001 to 10 lakhs: 10%

Managing your Cash Credit

Managing your cash credit facility effectively is very crucial for maintaining financial health and ensuring smooth business operations. Let’s see some best practices businesses can adopt:

1. Regular Monitoring and Tracking:

Maintaining and tracking detailed accurate records of all transactions made through the cash credit account.

2. Optimizing Inventory and Receivables Management:

 Maintaining optimal inventory levels to ensure funds are not tied up unnecessarily and ensuring timely receipt of payments.

3. Timely Repayments:

Avoiding the overdraft fees and penalties by ensuring timely repayments thereby also reducing the interest.

4. Periodic Reviews and Adjustments:

 Periodically reviewing the business's working capital needs and adjusting the credit limit accordingly.

5. Effective Cash Flow Management:

Creating accurate cash flow projections to anticipate and plan for future cash needs so not to be relying on credits.

6. Cost Control and Expense Management:

Regularly reviewing and controlling operational costs to ensure the funds are used efficiently and the cash credit facility is being utilized judiciously.

7. Financial Discipline and Planning:

Engaging in financial planning and preparing and adhering to a strict budget for managing finances effectively.

8. Build a Good Relationship with the Bank:

 Maintaining open and transparent communication with the bank regarding the business's financial status and needs.

9. Leverage Technology:

Using accounting software and digital banking tools provided by the bank to automate tracking and management of the cash credit facility. 

Adopting these best practices, businesses can manage their cash credit facilities more effectively and ensure that they maintain liquidity while minimizing costs and risks associated with borrowing.

Cash credit from SBI is by far the most helpful of financial strategy for businesses due to its flexibility, crisp processing, cost-effectiveness and ease of access, making it particularly beneficial for SMEs in need of reliable working capital solutions.