What is the difference between Cash Credit and Overdrafts?
Cash credit is a part of the Line of Credit that is allowed individuals and institutions by banks to draw money from the fund facility whenever required. Cash credit is a secured form of a line of credit due to the demand for collateral by the bank. Business vintage, i.e., the number of years the business has been in existence and operation at the time of borrowing the cash credit, becomes a requirement. Where Overdraft evaluates the borrower’s creditworthiness individually, the bank evaluates the creditworthiness of the business through its past financial statements to provide cash credit. Overdrafts can be available from an existing account, but cash credit can only be provided after creating a loan account with commitment charges.
Small and medium-sized businesses both need capital to operate their daily operations. Two options exist for business loan needs: long-term loans such as small business loans or lines of credit. Short-term flexible loans such as cash credit or Overdraft.
This post will discuss short-term loans, Cash Credit and Overdraft. It’s easy for people to believe that cash credit (CC) and Overdraft (OD) are identical due to their similarities. These two financial solutions can be tailored to meet different financial needs.
Let’s look closer at the differences between CC and OD to help you decide which one is best for your business.
What is Cash Credit?
Cash Credit (CC), a short-term loan offered to self-employed professionals or business owners, helps them meet their working capital needs. Cash credit has the following key features:
- This loan can only be used for business-related expenses.
- To deposit cash credit, you will need to open a separate account in your bank.
- You can request as many checks and books and perform as many transactions as possible.
- Documents such as balance sheets, GST filing, profit and loss statements, and balance sheets must be submitted once a quarter or annually.
- To get a cash credit loan, you will typically be asked to provide collateral.
- The agreed terms allow for the loan to be repaid weekly or daily.
What is an Overdraft?
Banks offer credit funding to selected customers through the overdraft facility. Current account holders can withdraw money from their bank accounts using the OD facility, regardless of their current balance. The following are key facts about Overdraft:
- Customers who have good relationships with the bank and are in a financially sound position will not be eligible for an overdraft facility.
- This facility is subject to a fee. It varies from one bank to the next. The additional amount you withdraw from your account will determine the fee amount.
There are similarities between Overdraft (OD), Cash Credit (CC), and Cash Credit (CC)
Cash credit and Overdraft can be used by businesses to obtain funds against their financial statements or inventories. After assessing customers’ financial status and relationships, banks offer short-term loans. The following are some other similarities:
- These financial instruments can be used to secure business assets and current inventory.
- Both interest rates are charged based on the amount used and not on.
Both CC and OD can be used by businesses to help them meet their working capital requirements. Although they may look similar, these products are very different. To make informed decisions, understand the differences and similarities between these products.
A small business loan might be a better option if you are looking for long-term loans. The interest rates are lower, and they can be used for longer periods.
