Know the Difference Between Overdraft And Cash Credit

Have you wondered why big and profitable businesses take loans? That is because they have mastered the concept of “borrow money to grow money”. Yes, that is true. If you can understand credit facilities such as bank overdrafts and Cash Credit loans, you can smartly manoeuvre the loaned funds to expand your business. Although Overdraft and cash credit are often spoken colloquially, they are quite distinct in their nature and purpose.

What are Cash Credit Loans and Overdraft Facilities?

A Cash Credit Loan is a short-term business loan that is offered to businesses to meet their working capital requirements.

An overdraft facility offered by banks allows businesses to withdraw money from their current accounts even if their account balance is low, zero, or below. Overdraft protection is an optional service, subject to the bank’s approval, that prevents the rejection of charges to a bank account in case of insufficient funds in the account. These transactions could be ATM withdrawals, debit card charges, and credit card cashback charges. Such a facility comes with an additional Overdraft Charge.

Thus, before applying for such loans, it is important to understand the similarities as well as the difference between them.

Similarities between Overdraft and Cash Credit

• Both are short-term flexible loans.

• Cash Credit limit and Overdraft amounts are repayable on demand.

• The interest on both is calculated on the amount utilized and not the entire sanctioned loan amount.

• The loan limit/amount sanctioned remains fixed in both cases and the borrower cannot apply for the additional fund under these existing loan accounts.

• Financing for both CC and OD is done against securities.

CASH CREDITOVERDRAFT FACILITY

The purpose for maintaining the working capital of the business.For meeting short-term obligations of individuals or businesses.

Interest Lower Higher

Interest Calculation The bank charges interest on the amount actually withdrawn and not on the entire sanctioned loan. The bank charges interest on the daily overdrawn balance but the interest is debited monthly.

Bank Account A separate bank account needs to be opened. The facility can be granted on your existing bank account.

Eligibility The cash credit loan eligibility is for only non-individuals.Both Individuals and non-individuals are eligible for Overdraft Loans.

Collateral Financing is against stocks, property, and/or inventory.Overdraft amount is decided based on the customer’s relationship with the bank, his/her credit history, and investments such as FDs, insurance policies, etc.

Loan Tenure The loan duration is generally 1 year. The loan duration can vary and it can be monthly, quarterly, half-yearly, or yearly.

Points to Consider Before Applying for a Cash Credit Loan or Overdraft Facility

• Processing Fee: The processing fee may vary from lender to lender. Compare the processing fee before proceeding with the loan.

• Rate of Interest: The interest rates on CC and OD facilities are higher than fixed-term loans like Loan Against Property. If you do not have surplus funds to park in a CC or OD account, you should consider a fixed-term loan.

• Minimum Utilization Charges: Some lenders levy a non-utilization charge if the CC or OD is not utilized up to a certain limit

• On-Demand Repayment: Whether it's a cash credit loan or an overdraft facility, both of these financing arrangements are payable on demand. In an overdraft facility, the repayment must be done along with the overdraft charge.

• Foreclosure Charges: Some lenders levy foreclosure charges when the borrower wishes to close the CC or OD account. They charge a certain percentage of the loan amount for closing the account.

Conclusion

Both cash credit and overdrafts are useful financial tools to secure funds for business working capital requirements. It is important to fully understand the features, benefits, and differences before deciding on one. And a smart business person knows how to leverage these facilities to grow their business.