Question

explain the role of cash of credit as a short term source of finance?

Answer 1

Dear Student,

Cash credit is a short term loan facility provided by commercial banks to its customers. Under this arrangement, the bank fixes a certain limit upto which the customer can withdraw. Suppose, a bank allows a cash credit of Rs 2,00,000 to a customer. Now, the customer has an option to wholly withdraw this amount or to withdraw in parts (subject to a maximum amount of Rs 2,00,000). Unlike a loan, in cash credit a customer is required to pay interest on the amount withdrawn only.

The business uses this facility quite often to meet its short term fund requirements.