Cash credit vs overdraft – What is the difference?

Both cash credit (CC) loans and overdraft (OD) facilities help fund business operations, but they are not the same, unlike popular opinion. Find out why.

Understanding CC

Short-term lending
Meets working capital requirements
No need for credit balance to avail it

Functioning of CC

Available for 12 months
Funds can be withdrawn up to a predefined borrowing limit
No limit on withdrawal frequency
CC limit is renewed after successful loan term completion
Interest is levied on withdrawn amount

Factors determining CC eligibility and borrowing limit

Credit history and score
Collateral type
Current assets and liabilities of business

CC loan features

Offered to businesses only
A separate bank account needed
Collateral needed usually
Repay loan daily or weekly
No limit on cheque books issued and transactions
GST filing, profit and loss statement, balance sheet required

Understanding OD

Account holder can borrow up to a certain amount when balance becomes zero
Interest is levied on withdrawn amount, until full repayment
A specific repayment tenure is involved

Functioning of OD

Withdraw funds up to a predefined limit
Account’s outstanding balance goes up
Full or partial repayment possible
Post repayment, overdrawing funds allowed up to limit

OD features

Offered to those who enjoy good relationship with lender
Big account holders can also apply
Fee levied on additional funds withdrawn varies across lenders
For joint account, both holders have repayment responsibility
Repayment pattern does not involve EMIs and is based on demand

Differences between CC and OD

Purpose
CC - Meets working capital needs
OD - For both businesses and individuals
Basis
CC - Availability of inventories and business stocks
OD - Relationship between applicant and lender
Interest rate
CC – Lower
OD – Higher
Account opening
CC – New account needed
OD – Existing account will do
Loan tenure
CC – 1 year usually
OD – Monthly, quarterly, half-yearly, yearly
Loan amount
CC – Sanctioned amount does not increase over time
OD – Sanctioned amount reduces every month

Similarities between CC and OD

Interest is charged based on withdrawn amount and not sanctioned amount
Maximum amount sanctioned is fixed
Repayment is based on demand and no prepayment fees
Both CC and OD facilities help small businesses but compare well before opting for one.


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