Are you curious to know what is CC limit? You have come to the right place as I am going to tell you everything about CC limit in a very simple explanation. Without further discussion let’s begin to know what is CC limit?
CC limit, or cash credit limit, is a financial term used by banks and other financial institutions to describe the maximum amount of money that a borrower can borrow from the institution on a revolving credit basis. A cash credit facility is a type of loan that provides funds to the borrower on a short-term basis to meet working capital requirements. In this blog post, we will discuss what a CC limit is, how it works, and its benefits and limitations.
What Is CC Limit?
A CC limit is a type of loan that allows a borrower to borrow funds on a short-term basis for working capital needs. The CC limit is the maximum amount that a borrower can borrow from the lender at any given point in time. The limit is decided based on the borrower’s creditworthiness, financial position, and the value of assets that the borrower pledges as collateral.
How Does CC Limit Work?
The borrower can draw down the CC limit as and when required, and interest is charged on the amount borrowed. The interest rate charged on a CC limit is usually higher than that charged on a term loan because the risk associated with a revolving credit facility is higher. The borrower is required to repay the borrowed amount and interest within a specified period, usually a year. Once the borrower repays the borrowed amount, the credit limit is restored to its original limit, and the borrower can draw down the funds again as per their requirements.
Benefits Of CC Limit
CC limit provides several benefits to borrowers, such as
- Flexibility: CC limit provides flexibility to the borrower to borrow funds as and when required and repay the amount as per their cash flows.
- Lower interest cost: CC limit charges interest only on the amount borrowed, which makes it a cost-effective financing option for working capital requirements.
- Quick aCCess to funds: Borrowers can quickly aCCess funds as and when required, without going through the tedious process of applying for a loan every time.
- Better cash flow management: CC limit helps borrowers to manage their cash flow better by providing them with funds on a revolving basis.
Limitations Of CC Limit
CC limit also has some limitations, such as
- High-interest rates: The interest rate charged on a CC limit is usually higher than that charged on a term loan, making it a costly financing option.
- Collateral requirements: Lenders require collateral to be pledged to secure the CC limit, which can be a challenge for borrowers who do not have sufficient assets to pledge.
- Short-term financing: CC limit is suitable for short-term financing needs and may not be an appropriate financing option for long-term capital investments.
Conclusion
In conclusion, a CC limit is a type of revolving credit facility that provides borrowers with quick aCCess to funds for working capital requirements. It is a cost-effective financing option that offers flexibility to borrowers in managing their cash flows. However, it is important for borrowers to understand the limitations of CC limits, such as high-interest rates and collateral requirements, before opting for this financing option.
FAQ
How Does CC Limit Work?
The features of cash credit are as follows: It is a short-term loan with a repayment period of up to 12 months. The interest rate is charged only on the amount withdrawn and not on the total sanctioned limit. You can withdraw money as many times as required from within the sanctioned limit.
What Is The CC Limit And Od Limit?
Loan amount: With cash credit, the loan amount sanctioned is based on the volume of stocks and inventory. On the other hand, the loan amount sanctioned under overdraft is based on financials and security deposits. Limit: While the limit does not reduce with cash credit, it reduces every month with an overdraft.
Is CC Limit A Term Loan?
Cash Credit is a short-term loan approved by banks for businesses, financial institutions, and companies to meet their working capital requirements. The borrowing company can take money, even without a credit balance, upto whatever borrowing limit exists.
What Is The Benefit Of A CC Limit?
A great way to meet your working capital requirements. Because this facility is like a secured loan, it permits easy aCCess to cash or liquidity. It also allows for faster processing. Lower interest payments because only the amounts borrowed from the total limit extended are subject to interest.
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