Bank Overdraft vs Cash Credit
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 line of credit or business loans, etc.
Cash credit and overdraft are two types of short-term loan facilities offered by lenders to businesses. An overdraft facility is also offered to individuals based on their relationship with the bank.
What is Bank Overdraft?
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 but 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 on the basis of the individual’s net worth.
What is Cash Credit?
Financial institutions extend short-term working capital to the company which allows the borrowers to utilize money without holding a credit balance in an account. The limit to withdraw funds is determined by the FI. Thus, cash credit is commonly offered to businesses rather than to individual consumers. If the customer doesn’t have enough funds in their account, they can use the cash credit for routine banking transactions up to the credit limit.
Thus, in the following situations, cash credit 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
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
To do operations of the business
To get raw materials, maintain storage, pay bills, etc.
It is calculated on only the amount used
It is calculated on the entire amount withdrawn
The current account of the owner’s bank
Need to open a separate account
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.
Amount withdrawing limit
Decided on account and relation with FI
Up to 60% value of receipts and inventory
Why Terkar Capital?
Terkar Capital is one such financial institution in India that arranges a wide range of financial instruments for clients. It studies all the aspects of financials, CIBIL score, business plan, industry, sales, etc. We arrange conventional and non-conventional debt and equity funding solutions. That too at a reasonable cost of borrowing. Our timely and confidentiality in the services makes us different from others. So whenever it is raising funds for corporations, Terkar Capital is ready to serve you at your best!