Bank Overdraft and Cash Credit difference
For running the daily operations working capital of the business is essential, and for that, the company needs to take short-term or long-term loans. So, the popular options in short-term loans are cash credit and overdraft and long-term loan options are the LC, BG, Factoring or business loans, etc.
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.
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 Bank Overdraft and Cash Credit
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Interest rate | It is calculated on only the amount used | It is calculated on the entire amount withdrawn |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?
One of the key considerations for businesses is understanding the difference between cash credit and overdraft facilities. So, at Terkar Capital, we offer various types of overdrafts, including standard overdrafts, secured overdrafts, and clear overdrafts. These loan options cater to different business requirements and help MSMEs effectively manage their working capital.
