Cash flow management is a critical aspect of running any successful business. Having access to financing options like cash credit can provide businesses with the working capital needed to cover short-term needs and boost operational efficiency. This article will explore what cash credit is, the benefits it provides, eligibility criteria, and tips for boosting cash flow.
What is cash credit?
Cash credit is a form of revolving credit provided by banks and financial institutions to businesses to meet working capital requirements. With a cash credit facility, a business can withdraw money up to a pre-approved credit limit sanctioned by the lender.
The key benefit of cash credit is flexibility – borrowers only need to pay interest on the amount utilised, not the full sanctioned amount. Cash credit provides easy access to capital for day-to-day business needs.
Benefits of cash credit
There are several advantages to utilising cash credit facilities:
- Quick access to capital within 48 hours of approval in most cases
- No collateral requirements
- High value capital extending from Rs. 2,00,000 to Rs. 55 lakh
- Flexible withdrawals based on working capital needs
- Only interest is paid on amount utilised, reducing cost
- Repayment flexibility aligned with business cash flows
Cash credit eligibility criteria
When evaluating eligibility for cash credit loans, NBFC lenders consider:
- Length of time business has been operational, usually 3+ years
- Indian citizenship
- CIBIL Score of 685 or more
- Self-employed work status
- A minimum age of 24 years at the time of application and maximum age of 70 years at the time of loan maturity.
Meeting the eligibility criteria demonstrates the business has financial discipline and cash flow to service the credit facility.
Tips for boosting cash flow
Once cash credit is secured, focus on maintaining healthy business cash flow to leverage the capital judiciously. Consider these tips:
- Prepare detailed cash flow budgets to understand projected income and expenses over a 3-6 month timeframe. Regularly update and analyse cash flow forecasts.
- Improve accounts receivable turnover by collecting outstanding dues rapidly. Offer customers discounts for early payments. Send payment reminders regularly and follow up with delinquent accounts.
- Keep inventory at optimal levels to ensure sufficient stock for operations without excess tying up capital. Use inventory management techniques like ABC analysis and JIT.
- Prioritise expenses and delay non-critical ones if cash balances run low in a particular month. Purchase raw materials and services just-in-time to reduce inventory holding costs.
- Renegotiate payment terms with suppliers and vendors to ease pressure on cash outflows. Offer to pay invoices early in return for payment term benefits.
- Use excess cash in flush months to temporarily prepay the cash credit loan balance above the required monthly dues. This reduces interest costs.
- Evaluate sales prices and product mixes to weed out low margin items that consume resources. Focus on profitable products that generate surplus cash.
- Implement technology like POS systems and accounting software to better track cash inflows and outflows. Automate processes to speed up collections.
- Increase sales of current products or services to existing customers. Cross-sell and offer discounts to generate more revenue.
- Assess if idle assets can be sold or rented out to boost short-term cash inflows. Monetize unused resources judiciously.
- Avoid excessive owner’s drawings or overheads if cash flow is tight. Suspend dividend payments until cash flow improves.
Cash credit is a valuable financing tool for companies looking to bolster their working capital needs. With proper planning and discipline, cash credit facilities can provide the fuel for business growth and operational efficiency. Monitoring cash flow actively is key to tapping the benefits of cash credit optimally. Consider discussing cash credit and ways to strengthen cash flow with your financial institution.