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Use of cc limit

Vivek Kumar (Pursuing Articleship) (71 Points)

21 May 2013

A pvt limited comp dealing with making wires and cables purchased a machinery worth 20 lacs. but the payments of installments for that machine is done through its cash credit(cc) account. can they do so? if not, then what payment can be made through cc account

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9 Replies

Giridhar S Karandikar (Team Lead) (7553 Points)
Replied 21 May 2013

Cash Credit is a type of Bank Account. It is convenient for persons having large business and having numerous transactions.

CC account is a bank account having features of loan account. The account holder can transact upto the CC limit authorized by the bank.

There's no harm in making loan repayment for machinery from the CC account as the payment is made itself from teh entity's bank account. So dont worry about it and you can make any payment from your CC account just as one makes payments from his normal current/saving account.

Vivek Kumar (Pursuing Articleship) (71 Points)
Replied 21 May 2013

ok.. thank you sir.it was really very imp for me

CA Kedar Sakhardande (Proprietor) (954 Points)
Replied 21 May 2013

I do not agree with shri karandikar CC account if not a clean advance, then necessariliy secured by Hypothecation of stock and book debts. In short, it is a working capital finance. And as per bank's norms and as a pruidency requirement has to be necessarily used for working capital related payments such as payment to creditors for goods, salary, electricity payments etc.

In the present situation, a payment of plant and machinery has been made through cash credit account, which means that capital asset payment has been made from working capital finance. Ideally, you should have availed term loan finance for the machinery instead utilising working capital facility.

In long run it could have a strain on your working capital financing and it may also be objected by your bankers.

These are my views

regards

Naresh Kansala (Visit www.nkansala.in for more article) (1425 Points)
Replied 22 May 2013

you both are right on your ends.

CC limit is for working capital management, long term expense payment (long term finance management) from this a/c create working capital problem in future. n distort future credibility of firm. Secondly it cost more in terms of interest as compare to the term loan.

but there is no bar on use of CC limit. its just like a loan. if firm has any monetary asset which can be realised in near future. they can use such short term loan for capital financing and reimburse the same on realization on monetary asset.

its better not to use such short term loan for capital financing.

Vivek Kumar (Pursuing Articleship) (71 Points)
Replied 22 May 2013

Now i am totally confused what to do

CA JIMI S PATEL (ACCOUNT INCHARGE - GUJARAT REGION) (98 Points)
Replied 22 May 2013

I am totally agree with MR. Kedar and also draw your attention to clause in Caro" Is there any short ter funds used for payment of long term liabilitiesor vise a versa "? In your situation it carries negative remark in CARO under this clause.

And when you give reports to your bank then they can easily traced this and it affects your future financing.

CA SANKET GARG (Sanket Garg & Company ) (838 Points)
Replied 29 May 2013

Kindly ask from the Company about "Sanction Letter" issued by the bank to them. In that letter all the terms and conditions, purpose of loans, etc has been mentioned by the bank at the time of granting the Loan. If in the sanction letter it is written that Company can use it for purchase of machinery then it is ok...otherwise Company has violated the bank conditions....alternatively Company can also approach bank to modify the sanction letter and add machinery purchase point in it, but it is lengthy process ...from cc account the authorised payments can be made for which cc limit has been granted....

Vivek Kumar (Pursuing Articleship) (71 Points)
Replied 30 May 2013

actually company purchase machine by taking term loan from icici bank. and payment of that term loan is done through cc account

CA SANKET GARG (Sanket Garg & Company ) (838 Points)
Replied 30 May 2013

purchase of machinery from term loan is correct because term loans generally are for these purpose only but payment of term loan from cc is wrong because cc is for fulfilment needs of wc...however somebanks madify this defect also....