Cash Credit and Overdraft Difference
When it comes to running a business, working capital is crucial to keep things going. That’s where finance comes in handy. The Cash Credit and Overdraft are two types of short-term loan facilities. It can give you a quick boost, while long-term options like LC, BG, factoring, and business loans can help you plan for the future. Lenders offer businesses two types of short-term loan facilities: cash credit and overdraft. An overdraft facility is also offered to individuals based on their relationship with the bank. Let’s learn the difference between cash credit and overdraft facility.
Bank Overdraft Facility
OD is a facility wherein a bank allows customers to borrow a set amount of money. There is interest on the loan, and there is typically a fee per overdraft. Thus, the Overdraft facility is giving current accounts to customers. So, the customers can withdraw the funds even after the account has zero balance.
OD is like any other loan. The account holder pays interest on it and will typically be charged a one-time insufficient funds fee.
There are different types of overdrafts:
1. Standard Overdraft
Standard Overdraft is withdrawing more funds than the account limit. So, the bank that permits overdrafts typically charges you a small fee for the service.
2. Secured Overdraft
It is like a traditional Loan. As financial institutions lend credit a wider amount of collateral is used to secure the funds.
3. Clear Overdraft
In this no separate security is present but the overdraft is given based on the individual’s net worth.
CC Facility
Cash credit is commonly offered to businesses rather than to individual consumers. Customers can use the cash credit for routine banking transactions up to the credit limit.
Thus, in the following situations, CC can be used to meet the working capital gap:
- Purchase of Raw Materials
- Maintain inventory
- Finance, sales, and other activities
- Warehousing, storage, etc.
- Rent, electricity, bills, etc.
Key Difference between Cash Credit and Overdraft Facility
Bank Overdraft | Cash Credit | |
Meaning | The facility offered by the bank to withdraw more than the account limit permits | Short-term funding extended by FI to meet daily working capital requirement |
Purpose | To do operations of the business | To get raw materials, maintain storage, pay bills, etc. |
Tenure | Long Term | Short Term |
Interest rate | It is calculated on only the amount used | It is calculated on the entire amount withdrawn |
Bank Account | The current account of the owner’s bank | Need to open a separate account |
Burrowing Limit | It is decided on the basis of collateral and financials | The cash credit limit is decided on the basis of inventory and stock volume. |
The general rate of Int. | Higher | Lower |
Amount withdrawing limit | Decided on account and relation with FI | Up to 60% value of receipts and inventory |
Why Terkar Capital?
Understanding the difference between cash credit and overdraft facilities is crucial for businesses, particularly MSMEs, which frequently struggle with working capital management.
To address this, Terkar Capital offers a range of overdraft options, such as standard, secured, and clear overdrafts. These facilities are tailored to meet diverse business requirements and enable effective working capital management, just like cash credit facilities.
Each loan option caters to specific business needs, allowing MSMEs to efficiently manage their working capital. By comprehending the differences between cash credit and overdraft facilities, businesses can make informed choices that align with their unique requirements.
