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CMA Intermediate · Financial Management and Business Data Analytics · Financing Working Capital

Which feature distinguishes a cash credit facility from a term loan in bank finance for working capital?

Cash credit allows the borrower to draw and repay repeatedly within a sanctioned limit, and interest is charged only on the amount actually drawn. A term loan is paid out in full and repaid in instalments, so it lacks this flexibility.

  1. AInterest is charged only on the amount actually drawn within a sanctioned limitCorrect
  2. BThe entire amount is disbursed at once and repaid in fixed instalments
  3. CFunds are advanced only against a specific bill of exchange
  4. DIt cannot be secured by hypothecation of stock

Explanation

Cash credit lets the borrower draw and repay repeatedly up to a sanctioned limit, with interest on the daily outstanding balance. A term loan is disbursed in full and repaid in instalments. Bill finance is a separate facility, and cash credit is commonly secured by hypothecation of stock.

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