Finance · 9 min read
Complete guide to working capital loans for MSMEs in India: Cash Credit vs OD vs bill discounting, how CC limit is set using MPBF, documents needed, interest rates, and how to improve your limit.
What is Cash Credit (CC) limit and how is it different from a term loan?
A Cash Credit (CC) limit is a revolving working capital facility. You withdraw as needed up to your sanctioned limit and repay as and when cash comes in. Interest is charged only on the amount used daily. A term loan is disbursed in full and repaid in fixed EMIs. For inventory and debtor cycles, CC is better. For capital assets (machines, vehicles), term loans are appropriate.
How does a bank decide my CC limit?
Banks use MPBF (Maximum Permissible Bank Finance) under Tandon Method II: CC limit = 75% of Current Assets − Other Current Liabilities. Your projected turnover, stock holding period, debtor collection period, and creditor payment terms determine current assets. The higher your legitimate current assets, the higher your CC limit.
Can a new business get a CC limit?
Yes, but it's harder. Banks prefer businesses with 2+ years of operations. For new businesses, you can get a term loan for capital assets plus a small working capital component. Once you have 1–2 years of operations, you can apply for CC. MUDRA Kishor and Tarun include working capital components for new businesses.
What interest rate applies to CC limits?
CC interest rates: MCLR/RLLR + spread (typically 1–3%). For PSU banks, effective rates range from 9.5–13% p.a. Interest is calculated daily on the outstanding balance (not the full sanctioned limit), so it's cost-efficient if you manage the account well.