CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital
Which of the following is a feature of a cash credit facility from banks, as distinct from a term loan?
In a cash credit arrangement, interest is charged only on the amount actually drawn and outstanding, not on the full sanctioned limit. This flexibility distinguishes it from a term loan with fixed instalments, and the facility is usually renewable annually.
- AInterest is charged on the entire sanctioned limit
- BInterest is charged only on the amount actually drawn from the limitCorrect
- CRepayment is in fixed monthly instalments
- DThe facility cannot be renewed
Explanation
In cash credit the borrower may draw up to a sanctioned limit and repay as funds permit, so interest is levied only on the daily outstanding balance. Charging on the entire limit applies to commitment-type charges, not interest. Fixed instalments characterise term loans.
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