CASH CREDIT AND OVERDRAFT
Both small and medium businesses need a timely influx of money to run their daily operations smoothly without any hiccups. However, in certain conditions, a business may require cash for its long-term or short-term goals. In such cases, there are two options available for taking a loan for business needs:
- Long-term loans, such as a 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 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 financial solutions are different from each other and are designed to cater to different financial requirements.Â
Now, let us take you through the similarities and differences between Cash Credit and Overdraft, 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 professional and require a short-term loan, then CashCredit 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 checkbooks and carry out multiple transactions as per your needs.
- Once every quarter or annually, you may be required to submit certain documents such as GST filings, profit and loss statements, balance sheets, etc.
- You may be required to put up collateral to get a cash credit
- The best part is that you can repay 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 a sound financial position.
- An overdraft facility is associated with a charge, and it varies from bank to bank. The amount of the 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 benefit from these financial tools, where they select customers by offering these short-term loans. These short-term loans are offered only after assessing their financial standing and the 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 the total amount sanctioned.
- The maximum amount sanctioned for both Cash credit and overdraft is fixed, and borrowers do not qualify for any additional money.Â
DIFFERENCE BETWEEN CASH CREDIT AND OVERDRAFT
The table below lists 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 the CSH Credit |
| Security/Collateral | Comparatively higher interest rate than the CSH Credit | 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 | Loan repayment tenure is generally 1 year |
| Tenure | The loan duration and repayment can vary. It can be monthly, quarterly, half-yearly, or yearly | Comparatively higher interest rate than CSH Credit |
| 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 |
| Individuals, traders, retailers, manufacturers, companies, partnerships, distributors, LLPs, sole proprietorships, etc., are eligible for a cash credit loan | Who is eligible | Applicable for both business and personal needs |
Both Cash Credit and Overdraft are financial tools that come in handy for businesses to cover 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 the differences and similarities and make a wise decision to choose between the two 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.
FAQs:
1) Are Cash Credit and Overdraft the same?
No, Cash Credit and Overdraft are different types of credit facilities. While both allow you to withdraw more than your available balance, Cash Credit is typically used by businesses against inventory or receivables, whereas Overdraft is linked to a bank account and can be used for general purposes.
2) What is a Cash Credit facility?
Cash Credit is a short-term loan provided mainly to businesses to meet working capital needs. It is usually secured against assets like stock or receivables, and the borrowing limit is based on the value of these assets.
3) What is an Overdraft facility?
An Overdraft allows individuals or businesses to withdraw money beyond their account balance up to a pre-approved limit. It can be secured (against assets like fixed deposits) or unsecured, depending on the bank’s policy.
4) Who can apply for Cash Credit and Overdraft?
Cash Credit is primarily offered to businesses and companies. Overdraft facilities, on the other hand, are available to both individuals and businesses.
5) What is the main purpose of Cash Credit?
Cash Credit is designed to finance day-to-day operational expenses such as purchasing raw materials, managing inventory, or covering short-term business obligations.
6) Can Overdraft be used for personal expenses?
Yes, Overdraft can be used for personal as well as business expenses, depending on the type of account and facility approved by the bank.
