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Cash credit is a type of financing provided by banks or financial institutions to businesses to meet their short-term working capital needs. It is a revolving line of credit where the borrower can withdraw funds up to a specified limit as needed and repay the borrowed amount based on an agreed-upon repayment schedule. Here are some key points to understand about cash credit:
Revolving Line of Credit: Cash credit functions as a revolving line of credit, similar to a credit card. The borrower is approved for a specific credit limit, and they can withdraw funds as needed within that limit. As the borrowed amount is repaid, the available credit is replenished, allowing the borrower to use the funds again.
Short-Term Financing: Cash credit is primarily used for short-term financing, typically to meet working capital requirements, such as purchasing inventory, managing cash flow, or covering day-to-day operational expenses. It provides businesses with flexibility in managing their cash flow fluctuations.
Interest and Repayment: Interest is charged on the borrowed amount as per the agreed-upon interest rate. The borrower is required to make periodic interest payments based on the repayment schedule. The principal amount is repaid based on the terms and conditions set by the lender, which may include periodic payments or lump-sum repayment.
Collateral and Security: Lenders often require collateral or security for cash credit facilities. This can be in the form of assets owned by the business, such as inventory, accounts receivable, or property. The collateral provides assurance to the lender in case the borrower defaults on the repayment.
Documentation and Review: To avail cash credit, businesses typically need to submit various documents, such as financial statements, tax returns, bank statements, and other supporting documentation. The lender reviews the business’s financials, creditworthiness, and repayment capacity before approving the cash credit facility.
Renewal and Review: Cash credit facilities are generally reviewed and renewed periodically. The lender assesses the borrower’s financial health and creditworthiness to determine whether to continue or modify the credit limit or terms of the facility.
Usage Restrictions: Cash credit is typically intended for business-related expenses and should be utilized for legitimate business purposes as agreed upon with the lender. Lenders may have specific usage restrictions outlined in the agreement.
Microfinance refers to financial services, such as loans, savings accounts, and insurance, provided to individuals or small businesses who lack access to traditional banking services. Microfinance aims to alleviate poverty, promote financial inclusion, and support economic development in underserved communities. Here are some key points to understand about microfinance:
Target Clients: Microfinance primarily serves low-income individuals, often referred to as micro-entrepreneurs or the unbanked or underbanked population. These individuals typically have limited or no access to formal financial institutions due to factors such as lack of collateral, limited credit history, or living in remote areas.
Services Offered: Microfinance institutions (MFIs) offer a range of financial services tailored to the needs of their clients. The most common services include microloans, microsavings, microinsurance, and sometimes money transfer services. Microloans are small-scale loans provided to individuals or small businesses to start or expand their income-generating activities. Microsavings accounts help clients save money in a secure manner. Microinsurance provides insurance coverage against risks such as illness, accidents, or crop failure.
Group Lending and Solidarity Groups: Many microfinance programs use a group lending model, where borrowers form small groups and collectively take responsibility for each other’s loans. This approach encourages mutual support, peer monitoring, and reduces the risks associated with lending to individuals without traditional credit histories.
Social Impact and Poverty Alleviation: Microfinance aims to have a positive social impact by providing financial services to marginalized individuals and communities. By enabling access to credit and financial tools, microfinance can empower individuals to start or expand small businesses, generate income, improve livelihoods, and lift themselves out of poverty.
Interest Rates and Sustainability: Microfinance institutions often charge higher interest rates compared to traditional banks due to the higher costs of serving small-scale borrowers with limited creditworthiness. However, some microfinance organizations operate as nonprofit entities with a social mission and prioritize affordability and sustainability while keeping interest rates reasonable.
Microfinance and Development: Microfinance is seen as a tool for economic development, empowering individuals and communities to become self-sufficient. It can contribute to job creation, entrepreneurship, women’s empowerment, and overall financial inclusion. However, the impact of microfinance programs on poverty reduction and long-term development remains a topic of ongoing debate and evaluation.
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