How to apply for Cash Credit Loan in the bank
Every businessman wants a cash credit loan to run the business because for the number of days you utilize the money in business, you have to pay interest only for those days. As soon as you deposit the money back into the account, you don’t need to pay interest for that time. And whenever you again need money for business, you can instantly withdraw it from there. Here, you have to pay less interest, which reduces your business expenses and increases your profit. So how will you apply for a cash credit loan in the bank? Let’s understand cash credit loans in a little more detail.
What is cash credit loan?
Suppose you run a production unit and manufacture a new product. To make that product, you need to purchase raw materials. You also have to spend on electricity, pay labor salaries, and incur wages. To sell the product, there are marketing costs, and there may also be transportation costs. All these day-to-day expenses are called working capital, and banks provide cash credit loans to fulfill this working capital need.
Cash credit loan eligibility calculation
But you cannot ask for as much cash credit loan as you want, and you won’t get it either. As per RBI guidelines, you can get around 20% of your turnover. Many customers come to us and most of them say, “Give me a loan of 50 lakhs or 1 crore.” But when we ask them what turnover they have shown in their IT file, they say 1 crore or 2 crore. However, you get only 20% of that.
This means if your turnover is 1 crore, you will get around 20 lakhs as a cash credit loan. But if your business needs 50 lakhs to run, then you can take the remaining amount as a term loan—for example, if you want to buy machinery or set up a factory.
Sometimes customers say that they have shown 1 crore sales in the IT file but actually their sales are 2 crores. But understand one thing clearly—you will get a loan based on what you show in your IT file, not on your actual sales. So start showing your real sales amount, and you will be able to get the full loan.
Operating of a Business
To calculate the cash credit loan amount, banks follow another method as well. Suppose you are running a production unit. First, you purchase raw materials using cash. After purchasing raw materials, you start production, which also takes some time. After that, the finished goods are ready. But even after the goods are ready, you need time to sell them. After delivery, the buyer may take another 10–15 days to complete the payment.
So, it takes some time for the cash to come back to you. It is possible that this entire cycle takes around 45 days to complete. Based on the total working capital used during this period, banks decide your cash credit loan amount. However, banks do not fund 100% of your working capital. They usually fund around 80%, and the remaining 20% margin must be managed by you.
If you want to apply for a cash credit loan in a bank, you also need to check your eligibility because banks do not provide cash credit loans to everyone. Salaried individuals cannot apply for cash credit loans. So, before applying for the loan, make sure to check whether you are eligible or not.
Cash Credit Loan Eligibility
First of all, as I told you, you must be a business owner. Cash credit loans are given to sole proprietorship companies, partnership firms, LLPs, and private limited companies. The minimum age should be 25 years. If the age is slightly lower, like 24 years, then in that case some banks may still provide a cash credit loan. Your business should be at least 3 years old. In the case of Mudra loans, even a 1-year-old business can get this working capital loan, but most banks provide cash credit loans only if the business is at least 3 years old.
Financial Statements
Documents like balance sheet, profit and loss account, and ITR are required to take a loan. As collateral, your stock can be taken as security in some cases. In some situations, banks also take additional collateral like machinery. If the loan amount is large, then additional collateral may be required, such as house property or factory, which can be given as mortgage.
Collateral
If your loan amount is less than 10 lakh, then you may not need to provide any additional collateral. Under the CGTMSE loan scheme, where loans up to 5 crore are given, even there full guarantee is not provided. So if someone is taking a 5 crore loan, banks prefer additional collateral because it becomes an unsecured loan.
That is why, even under the CGTMSE scheme, banks usually ask for at least 50% value collateral. For example, if you want a loan of 1 crore, then you may need to provide property worth 50 lakh as security. However, this is not a normal cash credit loan under the CGTMSE scheme.
If you go for a normal cash credit loan, banks may ask for property security equal to the loan amount. For example, if you are applying for a 1 crore loan, they may ask for property worth 1 crore. This can include house property, factory, or a combination of assets totaling 1 crore.
Revenue and Cash Flow
See, the turnover you have shown in your IT file should also be reflected in your bank. Your bank transactions should be good and should be at least 80% of your turnover. In that case, you can get a cash credit loan based on your turnover. But if your bank transactions are lower than that, then you may not get a cash credit loan according to your turnover.
CIBIL Score
CIBIL score is something that should have been mentioned first because it is checked in every loan, and here also it is checked. Banks check individual CIBIL score along with the company’s credit report. In CIBIL, what is called the CIBIL rank should be between 1 to 5. If the rank is higher than this, then most PSU banks do not provide loans.
If your individual CIBIL score is above 750, then you can easily get a loan. Even if it is 700+, some banks may still provide a loan. But if the score is lower than that, then it becomes difficult to get a loan. If your credit report has negative statuses like settlement, written-off, overdue, or suit filed, then you will not get the loan.
If your CIBIL score is very low, your loan will also be rejected. So before applying for a loan, check your credit report. If there are any errors or wrong information due to which your score is low, then first rectify it and only then apply.
Documents Required for Cash Credit Loan
Now documents are divided into three parts: KYC documents, income proof, and property documents. If you are not required to give additional collateral, then you only need to provide KYC documents and income proof. But if the bank asks for additional collateral, then you will also have to provide property documents.
KYC Documents
Here you need to provide PAN card, Aadhaar card, and any one address proof. Address proof can be Voter ID card, Driving License, Passport, or even an electricity bill in your name. Along with that, you also need to provide passport-size photographs.
This is not only for proprietorship firms. If your company is a partnership, then all partners need to provide these documents. In case of a private limited company, all directors need to provide these documents.
Proof of Business Registration
You need to provide a trade license and Udyam registration. If any additional licenses are required like food license or drug license, then those also need to be submitted. If your business falls under pollution control, then you need to submit that certificate as well.
For a partnership company, you need to provide a partnership deed and the company’s PAN card. For a private limited company, you need to provide the company’s PAN card, ROC registration certificate, MOA, and AOA.
Proof of Income
Under income proof, you need to submit IT files, which include profit and loss account, balance sheet, and ITR. These documents should be CA-attested.
Along with that, you need to provide the last 6 months’ bank account statement. Some banks may ask for 1 year’s statement. Preferably, it should be a current account used for business transactions.
If GST is applicable to your business, then you need to provide the GST registration certificate and last 1 year bank statement. But even if GST is not applicable, it does not mean you won’t get the loan.
Proof of Existing Facilities
If you already have any loans, then you need to provide the sanction letter and loan account statement. If the loan is recently closed, then you also need to submit the NOC.
When you apply for a cash credit loan, you also need to submit projected balance sheet and estimated profit & loss account, and these documents should also be CA-attested.
Because bank managers check how your business will progress after taking the loan and how you will repay it. If you are confident, the bank manager also feels confident in giving you the loan.
Property Documents
As I mentioned earlier, if you are required to provide additional collateral, then in that case you will also need to submit property documents. Property documents include title deeds, chain deed of the land, and the building sanction plan which has to be taken from the municipality.
You also need to provide the land mutation certificate, and the property tax should be up to date.
Now let’s talk about how you can apply for a loan.
You can apply for a loan online or by visiting the bank. Every bank has its own website where you can directly apply for a loan and also upload your documents there.
Similarly, you can visit the bank manager and apply for the loan. But one important thing you must keep in mind is to fill the application form correctly. This is very important. Also, collect all the documents together and then submit the application.
Because if any document is missing or incomplete, it will delay your loan process. Sometimes the process may stop in between or the loan may even get rejected. So first gather all the documents and fill the form properly, and only then apply for the loan.
I have tried to give you an overall idea of how to apply for a cash credit loan in a bank. If you need more information, you can contact us. Our helpline number is given in the description. You can contact us today and get advice over the phone. If you want, you can apply for a cash credit loan in the bank through us. You may get more benefits there because cash credit loans or similar loans require more detailed knowledge, which not every businessman is aware of in advance.
So applying through a consultant can sometimes give you more benefits.