Small and Medium Enterprises (MSMEs) are often the backbone of the economy. But businesses often face ups and downs in cash flow selling goods, waiting for payments, buying raw materials, paying salaries etc. One financial tool that helps with this is the Cash Credit facility. This blog explains what it is, who can get it, what’s good about it, and what to watch out for.

What is a Cash Credit (CC) Facility?

A Cash Credit facility is a type of short-term loan / working capital credit given by banks or financial institutions.
Under CC, a business is allowed to withdraw funds up to an approved limit in its current (or sometimes separate) CC account; interest is charged only on the amount used, not on the full limit.
It works like an overdraft: the business can draw funds whenever needed (up to the limit), repay, draw again, etc.

Who is Eligible: MSME Eligibility Criteria

Here are common eligibility conditions for MSMEs to obtain a Cash Credit facility:

Criterion	What it means (in simple terms)
Business registration / Legal status	The MSME should be properly registered (e.g. Udyam Registration in India), with valid business licenses, legal structure (proprietorship, partnership, LLP, private ltd etc.).
Financial history & credit score	Banks want to see past financial statements, profit & loss, cash flows. A good credit score or clean credit history helps.
Years of operations	Typically, MSMEs that have been operating for at least 1-2 years are preferred. New startups may need more documentation or collateral.
Turnover and profitability	Higher turnover and profits make approval easier and may get better interest rates. Businesses with erratic or low turnover may face stricter terms.
Collateral/security	Depending on the bank, sometimes collateral or guarantee may be required, especially if the amount is large or credit risk is higher. Some schemes or banks may waive collateral under certain Govt guarantees like CGTMSE.

Benefits of Cash Credit for MSMEs

Here are the key advantages:

Improved cash flow flexibility
You can meet daily expenses e.g. raw materials, salaries, inventories without having to wait for receivables to arrive.
Access whenever needed
Once limit is sanctioned, funds can be drawn (and repaid) multiple times; this flexibility helps manage peaks and troughs of business operations.
Interest only on utilized amount
You don’t have to pay interest on the full sanctioned credit limit if you haven’t drawn it all— you pay interest only on what you use, saving costs.
Helps in business growth & smooth operations
With a buffer available, MSMEs can plan for expansion, take up larger orders, respond to emergencies, or deal with seasonal demands.
Possibility of lower cost under Govt / guarantee schemes
Some MSMEs may access better terms under government credit guarantee schemes (e.g. CGTMSE in India), which reduce the requirement for collateral or reduce interest burden.sbifactors.in+3State Bank of India+3Credlix+3

Hidden Costs and Risks: What MSMEs Must Watch Out For

While Cash Credit is useful, there are costs, conditions, and risks that can catch you by surprise. Be alert to these:

Interest rate & floating rates
The interest rate may be variable (linked to base rate / MCLR etc.), so if rates rise, your interest cost rises. Also, banks may charge penal interest if the account goes beyond limit.
Commitment / penal charges
Sometimes banks charge a “minimum balance / commitment fee” on the unused portion of the limit, or penal fees if certain conditions are not met (e.g. late repayment, exceeding limit).
Processing fees / documentation costs
There may be one-time fees: processing charge, documentation, legal / loan establishment fees etc. These add to cost.
Security / collateral / guarantee cost
If collateral or third party guarantees are required, there may be cost (valuation, charges, or opportunity cost). Even if Govt guarantee is available, guarantee fee or annual fee may apply.
Overdraft / overuse penalties
If you use more than sanctioned limit, or delay repayments, banks impose penal interest or additional charges.
Impact on working capital if limit is insufficient
If the sanctioned limit is small or less than what business really needs during peak times, you might rely on expensive short-term borrowing, which can push costs up.
Covenants / conditions from bank
There might be conditions like maintaining certain current ratio, providing periodic statements, maintaining minimum stock / debtor turnover etc. Violating these could lead to higher rates, reduction in limit, or bank action.

What Are Some Typical Terms / How Much Does It Cost?

To give an idea (these are approximate, will differ by bank, region, credit profile):

Interest rates for CC might range from ~8% to 18% per annum depending on risk, amount, bank and scheme.
Processing fees could be 0.5-2% of the credit limit or amount sanctioned.
Commitment charges on unused portion could be 0.25-1% annually.
Collateral needed for larger limits unless scheme provides guarantee cover (e.g. CGTMSE) or specific bank policy.

How MSMEs Can Improve Chances / Reduce Costs

To get a better deal and avoid surprises:

Keep good financial records (books of accounts, audited statements). A cleaner history helps lower risk, hence better interest.
Register under government MSME schemes (e.g. Udyam) and take advantage of government guarantees. The CGTMSE scheme helps obtain collateral-free credit in many cases.State Bank of India+2Wikipedia+2
Negotiate terms: ask about commitment fees, penal interest, unused portion fees. Try to get favorable terms.
Use limit judiciously: draw only when needed, repay quickly to reduce interest cost.
Monitor interest rates & bank policy changes: since many rates are floating, stay aware of market / RBI / lending bank trends.

Final Say

A Cash Credit facility is a powerful working capital tool for MSMEs: it provides flexibility, immediate access to funds, and helps in managing day-to-day business operations. But it comes with costs and responsibilities. The key is to fully understand eligibility, read the fine print, negotiate wisely, and use it as a support tool rather than over-depend on it.

Cash Credit Facility for MSMEs: Eligibility, Benefits, and Hidden Costs