Difference Between Cash Credit & Overdraft

Overdraft & cash credit are great options for small businesses for their needs. Get to know the difference between overdraft & cash credit in simple way here!

7 Sep,2022 11:31 IST 11 views
Difference Between Cash Credit & Overdraft

Maintaining sufficient funds to meet your operational expenses is key to running a successful business. However, financial institutions can help you with various financing options if you face a cash crunch.

Overdraft facilities and cash credit loans are two of the most commonly used alternatives. Despite the misconception that both products are identical, they differ quite a bit. This blog explains everything about cash credit and overdraft differences.

What Is A Cash Credit Loan?

Cash credit loans are short-term loans provided by financial institutions to help small businesses fund their working capital needs. There is no requirement for companies to have a credit balance to use this funding option.

The list of factors determining your cash credit loan eligibility includes

1. Credit history
2. Type of collateral
3. A positive credit score
4. Business' current assets and liabilities

Key Features Of Cash Credit Loan

Following your introduction to the cash credit loan, its features are as follows

• You can only use a cash credit loan for business purposes.
• You must open a separate bank account to receive cash credit funds.
• Typically, financial institutions require collateral before approving cash credit loans.
• This financing arrangement allows you to repay your loan daily or weekly. There are, however, predefined rules, terms, and conditions for cash credit accounts.
• As part of this financing agreement, there is no restriction on using transaction numbers and chequebooks for the cash credit account.
• To qualify for this loan, you must provide your balance sheet, GST filing, and profit and loss statement quarterly and annually.

What Is An Overdraft Facility?

Financial institutions offer overdraft facilities that allow account holders to borrow up to a particular amount whenever their account balance reaches zero. In an overdraft account, interest applies specifically to the amount withdrawn. You must repay the borrowed amount within a certain period.

Key Features Of Overdraft Facility

The key points to remember about overdrafts are:

• Lenders offer overdraft facilities to customers with a good relationship and a significant investment or account with them. As a result, this facility may not be available to everyone.
• Whenever you withdraw additional funds from your account, financial institutions charge you a fee. The fees vary from one lender to another.
• You can apply for an overdraft even if you have a joint account. In this case, it is the responsibility of both account holders to repay the loan.
• Overdrafts have a different repayment schedule than regular loans. Lenders do not set up EMIs; you must make payments upon demand.

Cash Credit vs Overdraft Key Differences

The key difference between cash credit & overdraft include:

Parameters

Cash Credit Loan

Overdraft Facility

Purpose

Businesses can meet their working capital needs with a cash credit loan facility.

 

Individuals and businesses can use overdraft facilities to meet short-term financial obligations.

Basis

Stocks and inventories of the business determine the availability of cash credit loans.

A bank's overdraft facility depends on the applicant's relationship with the institution (the number of investments held, type of account, etc.)

 

Interest Rates

The interest rate on cash credit is lower than that of overdrafts.

The interest rate on overdrafts is slightly higher than that on cash credit.

 

Account Opening

To receive the cash credit loan amount, you must open a new account.

Existing accounts are eligible for an overdraft facility.

Loan Tenure

A cash credit loan usually has a one-year repayment period.

A monthly, quarterly, half-yearly, or annual repayment tenure is available for overdraft facilities.

Loan Amount

The sanctioned amount does not decrease over time under this financing arrangement.

The sanctioned amount on an overdraft facility decreases monthly.

 

Similarities between Cash Credit & Overdraft

• Cash Credit and Overdraft interest rates vary based on the amount utilised and not on the sanctioned limit or amount.
• Overdraft and Cash Credit amounts are repayable on demand.
• Current assets secure both of these financial tools.
• There is a set loan limit/amount sanctioned, and you cannot withdraw additional funds in either case.

Small businesses may benefit from cash credit loans and overdraft facilities to meet their working capital needs. You must evaluate both products and their interest rates before choosing a cash credit or an overdraft.

Apply For A Business Loan With IIFL Finance

Overdraft and cash credit are great options for small businesses to meet their short-term financial needs. However, if you want to cover your long-term business needs, a business loan might just be what you need.

With IIFL Finance online business loan, you can finance all your business needs, whether you're starting up or expanding. We offer a competitive business loan interest rate to ensure you don't have to reduce essential business expenses. Let IIFL Finance help you soar to new heights of success with an instant business loan!

Frequently Asked Questions

Q1. What is cash credit?

Ans. A cash credit loan is a short-term loan approved by banks to meet working capital needs.

Q2. Do you have to pay any fees for an overdraft facility?

Ans. A current account overdraft allows you to borrow over and above the amount in the account. This facility usually includes a fee.

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