What is the difference between Cash Credit and Overdraft?

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Cash Credit (CC) is a short-term loan offered to businesses to meet their working capital requirements, whereas Overdraft facility is funding offered by banks to individuals or companies to withdraw money from the banks even if their account balance is low, zero or below. Cash Credit and Overdraft are referred as credit limit sanctioned by lender or bank. Both of these financial instruments are used to borrow money against hypothecation of inventory or financial statements.

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Generally, Cash Credit and Overdraft are considered as similar funding products, still there are several differences between both of these financial instruments which we need to understand:

Cash Credit Overdraft
Interest rate is lower as compared to Overdraft Interest rate is comparatively higher
Cash credit loan can be availed on hypothecation of stocks and inventory Overdraft amount can be availed based on credit history, relationship with bank and investments like FDs, insurance policies, etc.
Cash Credit should be availed for business purposes, only Overdraft can be used for any purpose, including business related requirements
Loan amount is based on the volume of stocks and inventory Loan amount is based on financial statements and security deposited
Cash Credit does not reduce over time There is a monthly reduction in case of Overdraft
To avail Cash Credit, new account needs to be opened Overdraft facility is availed on existing account of the applicant (account holder)
Cash credit loan can be availed for minimum 1 year Overdraft facility can be availed for shorter tenure like a month or quarter, maximum for 1 year
Cash credit loans can be availed by individuals, retailers, traders, manufacturers, distributors, companies, partnerships, sole proprietorship, LLPs, etc. Overdraft facility can only be availed by account holders of the respective bank
Cash credit is sanctioned based on the business performance and market situation Overdraft is sanctioned based on financial statements and credit history

Points to remember while opting for Cash Credit or Overdraft

Processing Fee: Keep a check or compare processing fee charged by bank or financial institutions, as it may vary from bank to bank.

Interest Rate: The interest rate charged by lenders for Cash Credit loan is lower, as compared to Overdraft facility.

Loan Amount Utilization: Cash credit offers defined limit depending on the hypothecation of stocks, whereas there are few banks that charges extra amount on the unutilized loan amount after a certain time period.

Foreclosure charges: Some lenders do charge foreclosure charges, if the borrower wants to close the amount. In this case borrowers need to pay certain percentage of the loan amount to close their loan account that ranges from 1% to 2% in general.

Therefore, it is recommended to check all the additional and hidden fees and charges levied by the financial institution before opening a new account or availing Overdraft facility on existing account. Long-term funding is offered at low interest rate and short-term funding incurs higher interest rates.

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Similarities between Cash Credit and Overdraft

  • Interest rate offered by the lender for Cash Credit and Overdraft is charged on the amount of money utilized and not on the sanctioned amount or limit
  • Cash Credit limit and Overdraft amount is repayable on demand
  • Both of these financial tools are offered against the security of current assets
  • Loan limit and loan amount sanctioned remains fixed and additional money cannot be withdrawn in both the cases
  • Excess money can be withdrawn that sanctioned or available cash limit

Cash Credit and Overdraft are considered to be the two most vital financial tools to meet the short-term, as well as long-term requirements of an individual or company. Both of these products looks quite similar still are differentiated on various financial aspects. Cash Credit and Overdraft are considered to be popular types of business loan wherein minimum documentation is required.

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