CASH CREDIT AND OVERDRAFT
Business both small and medium need timely influx of money to run their daily operations smoothly without any hiccups. However, in certain conditions a business may require cash for their long-term or short-term goals. In such cases, there are two options available for taking a loan for business needs:
- Long-term loans like small line of credit or business loans.
- Short-term loans that are flexible and include loans like cash credit and overdraft.
This article is written in a moderate attempt to make you understand about short-term loans like Cash Credit and Overdraft. However, due to the similarities in the features of cash credit (CC) and overdraft (OD), we often get confused that they are the same. But both the financial solutions are different from each other and are designed to cater to different financial requirements.
Now, let us take you through the similarities and differences between Cash Credit and Over draft, so that it will be easy for you to understand and choose the better option for your business specific needs.
WHAT IS CASH CREDIT?
If you are a business owner or a self-employed proffessionals and require a short-term loan then Cash credit can help meet your requirements. In simple words, Cash credit is a short term solution of finance for a company. Some key points of Cash Credit include:
- The loan is applicable only for business-related expenses
- A separate bank account is to be opened for cash credit to be deposited.
- You can request multiple cheque books and carry out as multiple transactions as per your need.
- Once every quarter or annually, you may be required to submit certain documents such as GST filing, profit and loss statements, balance sheets, etc.,
- You may be required to put up a collateral for getting a cash credit
- The best part is you can re-pay the loan daily or weekly, depending on the agreed terms.
WHAT IS OVERDRAFT?
Overdraft is an extended credit funding facility provided by the banks to select customers. The overdraft facility allows a customer to pay for their expenses or bills or withdraw money from their bank accounts, even if their account balance is zero. Some key points to know about overdrafts include:
- An overdraft facility is only applicable to those who are in a good relationship with the bank and have sound financial position.
- Overdraft facilty is associated with a charge and it varies from bank to bank. The amount of fee charged also depends on the extra amount you withdraw from the account.
ARE THERE ANY SIMILARITIES BETWEEN CASH CREDIT (CC) AND OVERDRAFT (OD)
Cash credit and Overdraft are two different financial tools but both of them help businesses borrow money against their financial statements or inventory. Banks also get beneffited with these financial tools where they select customers by offering these short-term loans. These short-term loans are offered only after assesing the financial standing and their relationship with the bank.
Some of the other similarities include:
- Both Cash credit and overdraft are offered against the current inventory and security of business assets.
- The interest rate for both is charged on the amount used and not on on the total amount sanctioned.
- The maximum amount sanctioned for both Cash credit and overdraft is fixed, and borrowers does not qualify for any additional money.
DIFFERENCE BETWEEN CASH CREDIT AND OVERDRAFT
The table below list out the important and major differences between Cash Credit and Overdraft:
| Features | Cash Credit | Overdraft |
| Interest rates | Interest rates are lower | Comparatively higher interest rate than Csh Credit |
| Security/Collateral | Cash credit loan is offered upon speculation of inventory and stocks | Overdraft amount is decided based on the credit history of the customer and their relationship with the bank, and investments such as FDs, insurance policies, etc. |
| Usage | Applicable only for business needs | Apllicable for both business and personal needs |
| Tenure | Loan repayment tenure is generally of 1 year | The loan duration and repayment can vary. It can be monthly, quarterly, half-yearly or yearly |
| Sanction amount | The loan amount is decided based on the volume of inventory and stocks | The loan amount is decided based on security deposits and financial statements |
| Who are eligible | Individuals, traders, retailers, manufacturers, companies, partnerships, distributors, LLPs, sole proprietorships, etc. are eligible for cash credit loan | Only account holder of the respective bank are eligible for an overdraft facility |
Both Cash Crtedit and Overdraft are financial tools that come in handy for businesses to converge on their working capital needs. While both these products may appear similar, they are quite different from each other. This makes it essential for you to understand their features differences and similarities and make a wise decision to choose from both the products.
Alternatively, if you’re looking for long-term loans, and want to avoid higher-loan rates then a small business loan may make sense.
