LLP is something which anyone in business should be aware of. It is important for business partners to know about how LLP works
A limited liability partnership is a business partnership in which the partners have limited personal liability for the business’s debts, obligations, and actions. In other words, the other partners protect each partner’s personal assets. LLPs are not like corporations. This means that an LLP is liable for its debts, obligations, and actions only to the extent of its member’s share in the profits or losses of the LLP. The members’ proportionate shares of income and expenses are allocated among them in accordance with their contributions to the business. LLPs are not required to have a set number of partners but must have at least two. They can also be formed with more than one class of membership for the cash credit For LLP.
What Is Meant By Cash Credit?
Cash credit is a short-term cash loan or source of finance that is offered by the bank to its customers up to a specific limit to fulfil their day-to-day working capital requirements. The term “cash credit” is used in India and other countries where the banks charge interest on loans. Cash credit For LLP is extended by banks for various purposes, including the purchase of assets, purchase of raw materials, inventory, etc.
Cash credit For LLP can be availed for personal consumption purposes or for business consumption. In the case of personal consumption, it can be availed by individuals who need a quick flow of money for daily expenses such as groceries, household goods, and essential items like clothing and household appliances.
In case of business consumption, it can be availed by companies who need funds from time to time to expand their businesses or buy new machinery or equipment.
Can An LLP Take Cash Credit?
Yes, an LLP can take cash credit.
This is because an LLP, unlike a general partnership, is a separate legal entity from its partners. They retain liability and risk according to their personal Capital Contribution. Still, aside from that, the LLP remains a separate entity that can lease property, employ staff, open bank accounts, and even take cash credit from banks. Being a separate legal entity means the credit is given to the LLP itself and not its members, which protects them from the risk.
Now the question is, even though LLPs have the option of taking cash credit, is it worth the risk for the business?
Is It Worth Taking Cash Credit?
In most partnerships, cash credit For LLP is a perfect choice if there is a shortage of funds or other kinds of capital required for operating. It allows the business to get the funds they need to operate and turn a profit. It pays back the cash (and any interest generated from loans) to the bank.
A perfect example would be a newly formed LLP that provides legal representation, document drafting, and other services. These businesses need spacious quarters to operate from, ideally with offices for partners to hold meetings with prospective clients and customers. In this scenario, cash credit would allow the LLP to lease property using the funds and then later pay it back to the bank with all applicable fees within a specific period.
What Are the Benefits of Availing Cash Credit?
Cash credit is a short-term cash loan or source of finance that is offered by the bank to its customers. The benefits of cash credit are that it provides instant funds for your business needs, and it helps you avoid payment delays. It also allows you to meet any unexpected expenses without delaying the delivery of goods to your customers.
The following are some benefits of Cash Credit:
- Instant money: Cash credit comes with an instant money option, making it easy to access funds at any time. This feature allows you to meet any urgent need without waiting more than 24 hours. Some banks also allow you to borrow up to $100,000 with an online application form.
- Flexibility: If you have a business that needs funds daily, then cash credit will be ideal for you as it can help you meet your payments, even if they are small amounts at a time.
- Reduced interest rates: Unlike other types of loans where there is a higher interest rate associated with them, both short-term and long-term financing options offer lower interest rates with cash credits from banks or other lending institutions like credit unions or credit unions because they offer better terms than commercial lenders do.
- Easy and fast approval process: The application can be made online only, without any physical visit to the branch. It saves time and energy.
- A high approval rate: More than 90% of applicants get approved when they apply for a cash credit with their bank. In the case of other loans, it is less than 40%.
Things You Should Know About Taking Cash Credit
-
Cash Credit is Given Against Collateral Security
In most cases, cash credit is only given against collateral security. That means the Limited Liability Partnership has to put up something of equal monetary value to ensure that if the business sinks or fails to turn a profit, the bank doesn’t have to bear the brunt of the losses and lose the amount given to the LLP as credit.
-
It Requires the Consent of All Members of the LLP
Taking cash credit from a bank, however, also requires the consent of all participants and members of the Limited Liability Partnership agreement. This is because an LLP is jointly managed by the partners. Thus something as significant as cash credit is considered a point that has to be approved by all members first. The member(s) designated as the LLP’s representative will perform the requirements for the loan.
-
It’s Granted Through a Running Account
Banks can grant cash credit through a running account, where the drawings are regulated within a specific llp cash credit limit. This limit is determined by the bank after considering several factors like the composition of the LLP’s current assets and their current liability. The member(s) designated as the representative of the LLP can also choose to withdraw the loan in cash through the means of a cheque.
-
The Business Is Required to Prove Stability
To avail Cash Credit For LLP, a business has to prove that it has business stability. This is done through a Credit Monitoring Arrangement system, where CMA data is prepared by a third-party chartered accountant for the years for which the cash credit is availed.
Conclusion
Lastly, Cash Credit For LLP facilities are generally granted for 12 years and then renewed if required at the end of every year. Vakilsearch is a platform where you can learn more about LLP and cash credits. The takeaway is to remember that if you’re choosing to avail of cash credit from a bank, you’ll also need to hire a chartered account to prepare CMA data for every year you need the cash credit facility.
Read more
