In term of a loan, there are two options of loan can be taken for business, long-term funding like LAP (Loan against property) or to go for flexible funding like Cash Credit (CC) or Overdraft (OD) that operates in the shorter period of time. The flexible fund is gaining popularity because flexible funding gives the opportunity to save interest by depositing extra funds in the account and paying interest only for the amount needed. Both Overdraft and Cash Credit account are the type of loan accounts in which the account holder can withdraw the amount required. Overdraft and cash Credit are widely used as the external sources of finance for availing short-term borrowing at some cost.
Cash Credit is a facility provided by banks or financial institutions for short-term lending that is required to any company or organisation to fulfill their credit need. This credit amount is provided up to a predefined limit. This facility is provided for the business purpose only if the customers have submitted the company assets, inventory, company papers etc. to the financial institution. The limit of Cash Credit is generally supposed to be equal to the working capital requirement of the company. The withdrawal limit is decided by the bank and varies from bank to bank and borrower to borrower. Interest is charged on the extra withdrawal. Cheque book facility is provided. The bank has the right to demand money lent at any time.
Overdraft is a facility provided by the banks to their customers to withdraw more money from their accounts more than that available in their accounts. The overdraft facility is usually available to the current account customers and in exceptional cases to the savings account holders also. The extra withdrawal is decided by banks or, the financial institutions and they may vary from bank to bank and borrower to borrower. Interest is charged on the overdraft amount i.e. the extra amount that is withdrawn above the deposit. These are repayable on demand i.e. the bank can call the customer to repay the amount at short notice. Cheque book facility is available for the account holders. There are two types of Overdraft. When the overdraft facility is provided without any security to meet urgent financial needs, it is known as Clean Overdraft. However, when it is provided against the security of assets like land & building, shares, debentures, etc. it is known as Secured Overdraft. Similar to Cash Credit, the bank has the right to demand money lent at any time.
The difference between the Overdraft and Cash Credit are varied and the following are noteworthy differences between Cash Credit and bank Overdraft.
- An overdraft facility can be availed for any purpose (that means for personal use as well as for business purpose also). Cash Credit is specifically given for the purpose of business or, business related activities.
- In the Overdraft, the excess withdrawal facility is provided to the current account holders and in exceptional cases to the saving account holders. Whereas in Cash Credit the excess withdrawal facility is provided to the current account holders and in exceptional cases to the saving account holders.
- An overdraft generally does not require any asset as security to avail overdraft facility. On the contrary, cash credit requires assets like company inventory, property, receivables for excess withdrawal
- An overdraft is provided for a shorter duration of time (generally one week to one month). Cash credit can be short terms and medium terms also (generally up to 1 year).
- In the overdraft, the amount limit i.e. the excess withdrawal limit remains constant. In the cash credit, the excess withdrawal limit keeps varying as per the current assets kept as security.
- The rate of interest in overdraft is higher than that of interest charged on cash credit. The cash credits interest rate is normally lower than overdraft account.