A money credit comes with a borrowing limit determined by the creditworthiness of the borrower. A company can withdraw funds up to its established borrowing limit.
Interest on running balance
In contrast with other traditional debt financing methods such as loans, the interest charged is only on the running balance of the cash credit account and not on the total borrowing limit.
Minimum commitment charge
The short-term loan comes with a minimum charge for establishing the loan account regardless of whether the borrower utilises the available credit. For example, banks typically include a clause that requires the borrower to pay a minimum amount of interest on a predetermined amount or the amount withdrawn, whichever is higher.
The credit is often secured using stocks, fixed assets, or property as collateral.
Money credit is typically given for a maximum period of 12 months, after which the drawing power is re-evaluated.
CAPACITY: Capacity measures an individual’s ability to repay the loan. A loan is a kind of debt that you must repay in any situation. Lenders or any other financial institutions are very helpful in providing you with the funds when you are in dire need. However, they check your capacity by comparing an individual’s income against recurring debts and assessing his Debt- to- Income (DTI).
The debt-to-income ratio divides the total of all monthly debt payments by gross monthly income, giving you a percentage. A high DTI indicates your high usage of money in paying off other loans. Hence, the lower an individual’s DTI, the better the chances of availing loan.
Advantages of Money Credit
Source of working capital financing
A money credit is an important source of working capital financing, as the company need not worry about liquidity issues.
It can be easily arranged by a bank, provided that collateral security is available to be pledged and the realisable value of such is easily determined. There are many good at money lending in toa Payoh central
Withdrawals on a cash credit account can be made many times, up to the borrowing limit, and deposits of excess cash into the account lower the burden of interest that a company faces.
Interest payments made are tax-deductible and, thus, reduce the overall tax burden on the company.
A cash credit reduces the financing cost of the borrower, as the interest charged is only on the utilised amount or minimum commitment charge.