Cash Credit vs Overdraft
Working capital is an essential part of running the daily operations of any business, and for that, short-term or long-term loans are required. Cash credit and overdraft are popular options for short-term loans, whereas the line of credit, business loans, etc., are long-term loans.
Cash credit and overdraft facilities are offered by many lenders to businesses. Overdraft is also offered to individuals depending on their relationship with the lender. Below, we have explained the difference between cash credit and overdraft facilities.
What is Cash Credit?
Cash credit is a short-term loan offered to businesses and companies to maintain the working capital. They help businesses meet their daily operating expenses and can be used to cover urgent payments that are related to current assets, selling costs, etc.
Features of Cash Credit
- A cash credit facility has to be repaid within 12 months.
- You cannot cross the borrowing limit decided by the lender based on the customer's repayment ability.
- A minimal commitment fee is applied, irrespective of the way you use the loan amount.
- Cash credit can be availed against assets, like stocks or fixed assets.
Eligibility for Cash Credit
To be eligible for a cash credit, a business generally needs to be operational for at least 2 to 3 years, have a good credit history, and must be able to provide collateral (like real estate, inventory, etc.).
Specific eligibility parameters:
- Business vintage: Most lenders need businesses to be operational for at least 2 to 3 years to assess the business's stability and track record.
- Credit history: Customers with a good credit score and a track record of responsible borrowing are preferred. Lenders assess both the personal and business creditworthiness of the borrower.
- Collateral: Cash credit is often offered as a secured loan, requiring collateral, such as real estate, inventory, etc. The collateral’s value can influence the credit limit and interest rate.
- Income: Lenders will require proof of income, including tax returns and financial statements, to assess the business's loan repayment ability.
- Age: Minimum age requirements may vary from one lender to another, but many require at least 25 years old.
- Entity type: Entities like individuals, partnerships, sole proprietorships, LLPs, registered trusts, and various company types are eligible.
What is an Overdraft?
Overdraft facilities are offered to businesses as well as individuals (existing customers of lenders) who want to withdraw more than their available bank account balance. Overdrafts enable current account holders to withdraw funds or issue cheques up to a certain limit in case of low or even negative balances. Overdraft loan funds can be used to cover any short-term instant payments.
Features of Overdraft
- The customer can continue with transactions even in case of an insufficient account balance.
- Lenders charge some fees in case the accounts are overdrawn.
- Some lenders offer a protective Overdraft to avoid fines if the customer's account goes down to zero.
- An overdraft offers quick access to extra credit without any paperwork.
Eligibility for Overdraft
To be eligible for an overdraft facility, lenders consider the borrower’s income, creditworthiness, and credit score. Some businesses, such as proprietorship firms and partnerships, may also qualify.
Specific eligibility parameters:
- Citizenship: Generally, the applicant must be an Indian citizen to be eligible for an overdraft credit facility.
- Age: Most lenders require applicants to be aged between 21 and 65 years old.
- Bank account: You will need an existing savings or current account with the lender you are applying to.
- Income and creditworthiness: The lender will assess your income, creditworthiness, and CIBIL score.
- Business eligibility: Some businesses, like proprietorship firms, public/ private limited entities, partnership firms, etc., may also qualify for overdrafts.
- Documentation: You will likely need to provide identity proof, address proof, bank statements, salary slips or business financials.
Difference Between Cash Credit and Overdraft
The following are some key difference between CC and OD (i.e. cash credit vs overdraft).
| Factors | Cash Credit | Overdraft |
|---|---|---|
| Definition | Cash credit is a short-term loan facility type provided by lenders to businesses to maintain working capital | An overdraft is a loan facility provided by lenders to existing individuals or businesses, based on their relationship with the bank. Under an overdraft facility, you can withdraw more than your available balance up to a specified limit as per the regulations of the bank |
| Purpose | To maintain the working capital requirements of businesses | To meet short-term obligations of individuals or businesses |
| Interest rate | Comparatively lower than the overdraft | Higher than the cash credit |
| Need for an account | A new account has to be opened | An overdraft can be availed from an existing account |
| Interest calculation | Calculated based on the entire amount withdrawn | Calculated based on only the availed amount |
| Loan duration | Generally 1 year | It can vary, and it can be monthly, quarterly, half-yearly or yearly |
FAQs
After analysing the difference between OD and CC, it can be said that both facilities cater to different credit requirements. However, it is important to be cautious when availing of a short-term loan. One must understand the basic CC and OD difference and compare the interest rates applicable to both before choosing the one that suits their needs and budget.
Cash credit is a short-term loan offered to businesses and companies to maintain the working capital. It helps businesses meet their daily operating expenses and can be used to cover urgent payments that are related to current assets, selling costs, etc.
The interest rate on a CC limit typically ranges from 8% to 15% p.a., depending on the lender’s policy, the borrower's credit profile, and collateral offered. Some lenders offer interest rates as low as 10.50% p.a., while others may charge interest rates up to 25% p.a.
Yes, a cash credit facility can be used for many purposes, including personal expenses. However, it is crucial to understand your specific agreement’s terms and conditions before doing so. Cash credit is often availed of by businesses for their working capital requirements, but it can also be used by individuals to cover short-term financial needs.
Yes, you can avail of both cash credit and overdraft simultaneously for your business, as they both serve different purposes and can be used for varying financial needs.
Yes, usually a cash credit is cheaper than an overdraft facility because it is often secured, leading to a lower rate of interest. On the other hand, overdrafts are unsecured, so they typically come with higher rates of interest due to the increased risk for the bank.
Reshma Rawat is a passionate writer, with a decade of experience in writing for a variety of domains (finance, technology, lifestyle, e-commerce, real estate, etc.). Currently, she is working as Assistant Manager - Content @MyMoneyMantra, and writes blogs & webpages on financial products (loans, credit cards, insurance, financial policies by government, mutual funds, etc.
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