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)

To finance day-to-day business operations.
To manage inventory, raw material, and receivables.
Ideal for businesses with fluctuating working capital cycles.

Overdraft (OD)

To handle temporary cash shortages.
To pay urgent business expenses or bills before receivables are realized.
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?

Tags: Cash Credit vs Overdraft

9 months ago

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