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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

Under the cash credit system of bank finance for working capital, which feature distinguishes it from a fixed-term loan?

Cash credit lets the borrower draw and repay repeatedly within a sanctioned limit, with interest levied only on the daily outstanding balance. This flexibility distinguishes it from a term loan, which is disbursed in one lump sum and repaid in fixed instalments.

  1. AThe borrower pays interest on the full sanctioned limit regardless of use
  2. BThe borrower may draw and repay repeatedly within the sanctioned limit, with interest charged on the daily outstanding balanceCorrect
  3. CThe entire amount is disbursed at once and repaid in fixed instalments
  4. DThe bank lends only against bills of exchange drawn on customers

Explanation

In a cash credit arrangement the bank sanctions a limit, and the borrower can withdraw and deposit funds as needed within it. Interest is charged only on the amount actually utilised each day. Charging interest on the full limit or fixed instalments describes a term loan, not cash credit.

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