With many of the advantages of a standard line of credit, cash credit is the issuance of a short term cash loan to a business. A cash loan of this type if often utilized to meet the expenses associated with a specific task or project, with repayment expected within a period of one year or less. Successfully receiving cash credit and paying off the loan within terms can open the way for the business to be extended a more liberal line of credit for future use.
Cash credit works in a manner that is very similar to that of a line of credit. The difference is that cash credit establishes a cash account with the lender institution that can be drawn upon by the debtor. This is different from a conventional loan, in that the debtor does not have to receive the entire amount of the loan at one time. Cash credit is also different from a line of credit, as the amount of resources extended are pre-approved and the repayment schedule is the same whether the debtor is actively using the cash credit or not.
As with many types of financial assistance, cash credit is extended under terms that are set and controlled by the institution that provides the loan. Typically, cash credit involves the presentation of some form of security in order to be cover the amount of cash credit that is extended by the bank or loan agency. The security of collateral remains accessible to the lender until the cash credit is repaid in full.
One of the advantages for a new company is that cash credit can be an excellent way of setting the stage for a long term working relationship with a lender. Upon successfully complying with the terms of the cash credit agreement, the company may become eligible for other forms of assistance from the financial institution, including other forms of cash loans and the establishment of a conventional line of credit.
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