Cash Credit vs Overdraft: Know the Fundamental Differences

As a business owner or an individual, sometimes you may need to borrow money to meet your financial obligations. In such cases, you may come across various credit facilities such as cash credit and overdraft. 

While both of these facilities may seem similar, they have some fundamental differences that you should know before making a decision. In this article, we will explain the differences between cash credit and overdraft to help you make an informed decision.

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What is Cash Credit?

Cash credit is a type of credit facility offered by banks to businesses or individuals. It is a type of revolving credit facility, which means you can borrow money up to a certain limit and repay it at your convenience. The interest is charged only on the amount that you borrow and not on the entire limit.

The cash credit facility is usually secured against assets such as inventory, accounts receivable, or any other tangible asset that the bank can sell in case of non-payment of the loan. The bank sets a limit for the cash credit facility based on the value of the collateral provided by the borrower.

The borrower can withdraw money from the cash credit account as and when required. The repayment terms are flexible, and the borrower can repay the borrowed amount in instalments or in a lump sum as per the agreement with the bank. The interest rates on cash credit are usually lower than other forms of credit, such as credit cards or personal loans.

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What is Overdraft?

Overdraft is another type of credit facility offered by banks to businesses or individuals. Unlike cash credit, the overdraft is not secured against any assets. It is a type of unsecured credit facility that allows the borrower to withdraw more money than they have in their bank account.

In an overdraft facility, the bank sets a limit for the borrower, which is usually based on the borrower’s credit history and financial standing. The borrower can withdraw money up to the overdraft limit, and the interest is charged only on the amount withdrawn.

The repayment terms for overdrafts are flexible, and the borrower can repay the borrowed amount at their convenience. The interest rates on overdrafts are usually higher than cash credit, as the facility is unsecured.

Differences between Cash Credit and Overdraft

While both cash credit and overdraft may seem similar, there are some fundamental differences that you should know before choosing between them. Let’s take a look at some of the key differences between cash credit and overdraft.

Security

One of the key differences between cash credit and overdraft is the security. Cash credit is a secured credit facility, which means it is backed by collateral provided by the borrower. On the other hand, the overdraft is an unsecured credit facility, which means it is not backed by any collateral.

Interest Rates

The interest rates on cash credit are usually lower than an overdraft. Since cash credit is a secured credit facility, the bank has some security in the form of collateral. This reduces the risk for the bank, and they offer lower interest rates to the borrower. On the other hand, since overdraft is an unsecured credit facility, the bank bears a higher risk, and they charge higher interest rates.

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Withdrawal Limit

In a cash credit facility, the borrower can withdraw money up to a certain limit, which is usually based on the value of the collateral. On the other hand, in an overdraft facility, the borrower can withdraw money up to the overdraft limit, which is usually based on the borrower’s credit history and financial standing.

Repayment Terms

The repayment terms for a cash credit and overdraft are flexible, and the borrower can repay the borrowed amount at their convenience. However, in a cash credit facility, the borrower can repay the borrowed amount in instalments or in a lump sum, whereas in an overdraft facility, the borrower has to repay the entire amount in one

Ways in which Cash Credit and Overdraft are Similar?

  • Both Cash Credit and Overdraft charge interest only on the amount that is utilized, not on the limit that is sanctioned by the lender.
  • Cash Credit limit and Overdraft amount are repayable on demand, giving the borrower the flexibility to repay the borrowed amount at their convenience.
  • Both of these credit facilities are offered against the security of current assets, providing the lender with some form of collateral in case of non-payment.
  • In both Cash Credit and Overdraft, the loan limit or amount sanctioned remains fixed, and additional funds cannot be withdrawn once the limit is reached.
  • Cash Credit and Overdrafts are popular credit facilities that businesses and individuals can use to meet short-term and long-term financial requirements. Despite their similarities, these facilities differ in various financial aspects. Minimal documentation is required for both Cash Credit and Overdraft, making them popular types of business loans.
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While both facilities may seem similar, they have some fundamental differences that borrowers should know before making a decision. Cash credit is secured against assets, while overdraft is not secured. The interest rates on cash credit are usually lower than on overdrafts. Both facilities are offered against the security of current assets, and the loan limit or amount sanctioned remains fixed. Repayment terms are flexible for both.

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