What is Cash Credit?
Cash Credit is a short term loan approved by banks for businesses, financial institutions and companies to meet their working capital requirements. The borrowing company can take money, even without a credit balance, upto whatever borrowing limit exists.
Cash credits are also called working capital loans as they fund the instant cash requirements of the organizations, or to purchase current assets.
What is an Overdraft?
An overdraft is a credit facility that allows money to be taken out of a current or savings account even if the balance falls below zero. It is a form of monetary limit extension provided by banks, and the money is referred to as ‘overdrawn.’ Each customer is given an allowed overdraft limit based on their connection with the bank. The consumer has the option of withdrawing money up to the specified amount. Banks only charge interest on the portion of the overall sanctioned limit that has been used.
Similarities between Cash Credit and Overdraft
Cash credit and overdraft are both financial tools that allow companies to borrow money against their financial statements or inventories.
Banks pick consumers for these short-term loans after evaluating their financial situation and relationship with the bank.
The following are some of the other parallels:
- Both of these financial instruments are secured by the security of existing inventory or business assets.
- Both interest rates are based on the amount borrowed, not the amount borrowed.
Cash Credit vs. Overdraft
Cash credit is a type of company loan that is used for a brief period of time. It is intended for business owners that want immediate working funds. An overdraft, on the other hand, is a type of long-term financial aid. It allows you to withdraw money from your account even if there is no money in it.
Both are referred to as credit facilities that banks or lenders provide to borrowers. The hypothecation of the company’s inventories is used by your lender for this reason. Even bank statements are taken into account by some financial organisations.
| Features | Cash Credit | Overdraft |
| Interest rates | Lower interest rate as compared to Overdraft | Comparatively higher interest rate |
| Calculation of Interest | Calculated based on the entire amount that is withdrawn | Calculated based on only the amount that is availed |
| Security/Collateral | Cash credit loan is offered upon hypothecation of inventory and stocks | Overdraft amount is decided based on the relationship with the bank, credit history, and investments such as FDs, insurance policies, etc. |
| Duration of loan | The loan duration is generally 1 year | The loan duration can vary and it can be monthly, quarterly, half yearly or yearly |
| Usage | The funds can be used only for business purposes | The funds can be used for expenses other than business needs |
| Need of account | New account needs to be opened | Overdraft can be availed from an existing account |
| Maximum amount | Up to 60% of the value of your inventories and receipts | The lender decides based on your account and your relationship with the institution |
| Tenure | Tenure is generally of 1 year | The loan duration can vary. It can be monthly, quarterly, half-yearly or yearly |
| Limit of withdrawal | Can be changed based on the value or quantity of your inventories | Cannot be changed. Your current balance may influence your current account |
| 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 |