Cash Credit vs Overdraft: Key Differences & Uses
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Cash Credit vs Overdraft: Key Differences & Uses
Both Cash Credit (CC) and Overdraft (OD) are short-term financing options provided by banks, but they serve different purposes and have distinct features.
What is Cash Credit?
Cash Credit is a short-term loan offered to businesses to meet their working capital needs. It is typically secured against stocks, receivables, or fixed assets.
Features of Cash Credit:
✔ Short-Term Loan – Must be repaid within 12 months.
✔ Predefined Limit – Based on the business’s financial strength.
✔ Security Required – Usually backed by inventory or assets.
✔ Lower Interest Rate – Compared to Overdraft facilities.
✔ For Business Use Only – Not available for personal financial needs.
What is an Overdraft?
An Overdraft allows an individual or business to withdraw more than the available balance in their current account, up to a pre-approved limit.
Features of Overdraft:
✔ Flexible Withdrawal – Transactions continue even with insufficient funds.
✔ Higher Interest Rate – Compared to Cash Credit.
✔ No Collateral Required – Based on creditworthiness.
✔ Personal & Business Use – Covers unexpected expenses.
✔ Minimal Paperwork – Can be availed on an existing account.
Key Differences Cash Credit (CC) vs Overdraft (OD)
| Basis | Cash Credit (CC) | Overdraft (OD) |
|---|---|---|
| Purpose | Designed to meet working capital needs (e.g., inventory, receivables, raw materials). | Used mainly for temporary liquidity or to meet short-term cash flow mismatches. |
| Eligibility | Granted mainly to businesses against stock-in-trade, debtors, or receivables. | Available to both individuals and businesses, often against fixed deposits, salary accounts, property, or investments. |
| Security / Collateral | Usually secured by hypothecation of current assets and may require additional collateral. | Can be secured or unsecured, depending on the relationship and security offered (FDs, property, etc.). |
| Limit Determination | Based on drawing power, calculated from stock and receivables statements submitted periodically. | Based on the value of collateral or creditworthiness of the borrower. |
| Interest Calculation | Interest is charged only on the amount utilized, not the full limit. | Same — interest is charged only on the utilized amount. |
| Repayment & Tenure | Continuous credit facility; limit reviewed annually based on turnover and financials. | Usually renewed yearly; repayment terms can vary based on security and bank policy. |
| Account Nature | Operates like a separate current account with credit and debit transactions. | Operates as an overdraft facility on an existing current/savings account. |
| Documentation & Monitoring | Requires regular submission of stock statements, debtor lists, and other financial data. | Minimal documentation (especially when secured by FDs or property). |
| Typical Users | Traders, manufacturers, wholesalers — businesses needing regular working capital. | Professionals, individuals, or businesses needing occasional short-term funds. |
Cash Credit (CC)
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To finance day-to-day business operations.
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To manage inventory, raw material, and receivables.
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Ideal for businesses with fluctuating working capital cycles.
Overdraft (OD)
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To handle temporary cash shortages.
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To pay urgent business expenses or bills before receivables are realized.
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Useful for individuals for short-term liquidity (e.g., backed by FD or salary).
Key Differences Between Cash Credit and Overdraft- Quick Summary
| Feature | Cash Credit (CC) | Overdraft (OD) |
|---|---|---|
| Purpose | Business needs (working capital) | Personal & business financial shortfalls |
| Interest Rate | Lower | Higher |
| Loan Tenure | Usually 1 year | Flexible (monthly, quarterly, yearly) |
| Security Required | Yes (inventory, fixed assets) | No (credit score-based) |
| New Account Needed? | Yes | No (can be used on existing account) |
| If you are a… | Preferred Facility | Why? |
|---|---|---|
| Business with recurring working capital needs | Cash Credit (CC) | Continuous access to funds tied to inventory and receivables. |
| Individual or small business with occasional liquidity gaps | Overdraft (OD) | Easier approval, flexible usage, and lower documentation. |
Bottom Line
- Cash Credit is ideal for businesses needing regular working capital.
- Overdraft is useful for individuals or businesses facing temporary cash shortages.
- Always compare interest rates, fees, and terms before choosing the best option.
Would you like help comparing current interest rates on CC and OD from different banks?