Over Draft/Cash Credit

Cash Credit (CC) is a short-term loan offered to businesses to meet their working capital requirements, whereas Overdraft facility is funding offered by banks to individuals or companies to withdraw money from the banks even if their account balance is low, zero or below. Cash Credit and Overdraft are referred as credit limit sanctioned by lender or bank.

Generally, Cash Credit and Overdraft are considered as similar funding products, still there are 9 differences between both of these financial instruments which we need to understand:

• Cash Credit

  • Interest rate is lower as compared to Overdraft.
  • Cash credit loan can be availed on hypothecation of stocks and inventory.
  • Cash Credit should be availed for business purposes, only.
  • CLoan amount is based on the volume of stocks and inventory.
  • Cash Credit does not reduce over time.
  • To avail Cash Credit, new account needs to be opened.
  • Cash credit loan can be availed for minimum 1 year.
  • Cash credit loans can be availed by individuals, retailers, traders, manufacturers, distributors, companies, partnerships, sole proprietorship, LLPs, etc.
  • Cash credit is sanctioned based on the business performance and market situation.

• Overdraft

  • Interest rate is comparatively higher
  • Overdraft amount can be availed based on credit history, relationship with bank and investments like FDs, insurance policies, etc.
  • Overdraft can be used for any purpose, including business related requirements
  • Loan amount is based on financial statements and security deposited
  • There is a monthly reduction in case of Overdraft
  • Overdraft facility is availed on existing account of the applicant (account holder)
  • Overdraft facility can be availed for shorter tenure like a month or quarter, maximum for 1 year
  • Overdraft facility can only be availed by account holders of the respective bank
  • Overdraft is sanctioned based on financial statements and credit history