Card issuers like One Credit Card simplify the repayment process with their user-friendly app, enabling you to manage and track your credit usage effectively. Very often, businessmen assume that both cash credit (CC) and overdraft (OD) are the same. While these two short-term loan options may appear similar, they are two vastly distinct financial solutions catering to different requirements.
Alternatively, if you’re looking for long-term loans, then a small business loan may be the better choice as the interest rates are significantly lower. Cash Credit is a short-term loan offered to businesses to meet their working capital needs. Cash credit, on the other hand, is a type of short-term loan typically offered to businesses, allowing them to borrow money against a secured asset such as inventory, receivables, or fixed assets. An overdraft is a credit facility provided by a bank that allows account holders to withdraw more than what is available in their bank account, up to a predetermined limit. If a customer wants to add overdraft protection on their account, they must apply for the service just as they would for any other credit facility. The bank reviews the application and approval is subject to the customer’s creditworthiness.
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Imagine running a small business in Mumbai; cash credit could help you manage inventory costs, while an overdraft might cover unexpected expenses. Cash credit and overdraft are two types of short-term financing options provided by banks to help businesses and individuals manage their finances more flexibly. Cash credit is a specific loan limit granted to companies to finance their working capital requirements. It allows businesses to withdraw funds from a dedicated borrowing account up to a certain limit, which is often secured against company assets like inventory or receivables. Interest is charged only on the amount utilised, not the entire credit limit. Cash credit and overdraft facilities play a pivotal role in financial management for both businesses and individuals.
These tools are designed to enhance liquidity and ensure that operations can continue without interruption, even during periods of reduced cash flow. When it comes to the approval process, cash credit facilities are usually more difficult to obtain than overdraft facilities. Banks and financial institutions typically require borrowers to provide collateral or meet certain credit criteria to qualify for a cash credit facility.
With an overdraft, the bank reduces the credit limit every month, unlike with cash credit, where the credit limit remains the same. Cash credit generally requires collateral that will act as a guarantee for loan repayment. In contrast, in most cases, overdraft facilities do not require collateral, especially for smaller amounts. The bank grants them on the basis of your credit history, investments, and relationship with the bank. Business success relies heavily on planning and making strategic decisions.
Our dedicated and best-in-class customer service will go the extra mile (or two) to support you on every step of your credit journey. Cash credit and overdraft are two types of short-term financing that financial institutions provide to their customers. Cash credit provides lower interest rates with collateral backing, while overdrafts offer flexibility with higher fees. Evaluating credit history and cash flow needs helps businesses choose the right option. Cash credit provides businesses with loans to cover various obligations, such as inventory purchases and managing expenses.
- For example, if the set limit is 30% and you use less than thirty thousand for a month, you will be charged a penalty.
- An Overdraft allows an individual or business to withdraw more than the available balance in their current account, up to a pre-approved limit.
- On the other hand, an overdraft is a financial arrangement that allows an account holder to withdraw more money than is available in their account, up to a pre-approved limit.
- Banks offer this facility on the basis of the creditworthiness of the borrower.
- It is a drawing account, against a fixed credit limit which banks extend.
Banks normally review whether to continue extending overdraft protection to a customer on a regular basis. Unlike cash credit, customers can’t claim interest paid on overdraft protection for a tax deduction. Cash credit allows businesses to borrow funds against the security of their current assets, such as inventory or receivables.
There can also be account-opening charges, but you can negotiate with the lender about the same. Also, you can avail of other credit facilities like a letter of credit (LOC), bank guarantee, and Line of Credit from the financial institutes. Once you have started a transaction by cash credit or overdraft and your track record is good, these additional credit facilities can help your business further.
Key Takeaways
When it comes to managing finances, individuals and businesses often rely on various forms of credit to meet their financial needs. While both options provide access to funds when needed, there are key differences between the two that can impact how they are used and their overall cost. Any small or mid-sized businesses need loans to scale up their business. The underutilisation charge, as discussed above, and account-closing charge can be very high for banks and financial institutions. You must keep that in mind before considering moving your CC or OD account to another lender.
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- Post maintaining cash reserves as per RBI norms, banks can lend their deposits to those in need.
- Read this article to know both systems’ major differences and working processes.
- One should learn about the processing charges to have a better idea of the total cost of the loan and make an informed decision.
- It typically offers higher overdraft limits and has smaller real interest costs on borrowed funds than an overdraft because penalty fees aren’t triggered for using the account.
This interest rate is considerably lower than the cash credit interest rate. Cash Credit is a short-term loan specifically designed to help small and medium-scale businesses during a liquidity crunch. Also called a Working Capital Loan, the typical duration for a Cash Credit account is 12 or fewer months. The interest is charged on the utilised limit of the daily closing balance and not on the sanctioned limit. Both CC and OD act as handy financial tools to help businesses meet their working capital needs. So, make sure to understand the features and other additional fees before you choose the right product.
Working Capital Management
But what happens when an unexpected challenge strikes or a golden opportunity pops up out of the blue? In these moments, choosing the right financing solution can be a game-changer. While both are short-term loans that fund day-to-day operations, they come with requirements and advantages tailored to different situations.
Credit Limit Flexibility
In cash credit, repayments are typically made through periodic installments or as per the terms agreed upon with the bank. On the other hand, overdraft repayments are flexible, and businesses can repay the overdrawn amount at their discretion, usually without a fixed repayment schedule. Cash credit usually has a fixed credit limit that is not cash credit vs overdraft regularly reviewed. Conversely, lenders can adjust the credit card limit of overdrafts based on performance and requirements.
Cash credit is better suited for businesses requiring a revolving line of credit, offering lower interest rates and more structured terms. The immediate availability of funds makes overdrafts highly convenient for those who need access to cash without undergoing a lengthy loan approval process. Overdrafts are most beneficial for individuals or small businesses facing short-term, unforeseen expenses. Borrowers can only use the funds for the intended purpose, and any misuse of the credit facility could lead to penalties or termination of the agreement. Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app. Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.
For example, if you avail a cash credit facility at 10% interest, an overdraft might cost you 12% or more. Both cash credit and overdraft are financial instruments that help businesses borrow money against inventory or financial statements. Both CC and OD are offered by banks to select customers after evaluating their financial standing and considering their relationship with the bank. Furthermore, it is also called a cash reserve account and is considered an unsecured line of credit like an overdraft. It provides a higher credit limit than the regular overdraft service provided by the bank.
It provides flexibility in accessing funds as needed and interest is charged only on the amount utilized. Banks provide overdraft facilities to the customer upon the written request of the customer. Also, the bank may ask for a promissory note or personal security to ensure the safety of the amount withdrawn.