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

Which of the following is a feature of a cash credit facility granted by a bank to a business for financing working capital?

Cash credit lets the borrower draw and repay repeatedly within a sanctioned limit, with interest charged only on the amount actually utilised each day. It is a flexible, secured facility against current assets, unlike a term loan, which is fully disbursed upfront, or bill discounting.

  1. AThe entire sanctioned amount is disbursed at once and interest is charged on the full amount
  2. BThe borrower may draw and repay repeatedly within the sanctioned limit, and interest is charged on the daily amount actually utilisedCorrect
  3. CThe facility can be used only to discount trade bills drawn on customers
  4. DThe facility is given only against personal guarantee with no security of current assets

Explanation

Under cash credit the bank fixes a limit against hypothecation or pledge of current assets. The borrower can withdraw and deposit funds as needed, and interest is charged only on the balance actually used. Option A describes a term loan, and option C describes bill discounting.

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