Cash Credit vs. Overdraft : Which One is Better

In today's competitive world, if you are running a company or a business owner, then you must know how difficult it is to manage finances and meet the working capital needs of the business. Management and business operations require a proper cash flow to carry on. To tackle this ongoing challenge, cash credit loans and overdraft facilities are being assured by financial institutions to businesses and running companies.

A cash credit loan is a short-duration loan offered to companies and businesses in need of meeting up with their working capital requirements. An overdraft facility is being offered to individuals, companies and ventures as a credit funding facility.

The cash credit loan and overdraft facility are called credit solutions offered by banks and financial institutions to customers/borrowers. Cash credit and overdrafts often seem similar but are different.

What cash credit loan offers?

Cash credit offers loans at a low-interest rate; the limit is flexible depending on the value of assets collateral, whereas banks have the authority to minimise and maximise the credit limit. A new bank account is opened to avail of cash credit, which is availed for one year. After that, the amount allotted is based on the business performance and market situations. Cash credit loans are available to individuals, business owners, companies, distributors, LLP etc.

What does an overdraft facility offer?

This credit facility is being offered to existing account holders of the bank based on their relationship with banks. In this loan facility, customers can withdraw more money than the actual balance. An overdraft facility is associated with a current account or secured loan against credit; individuals and business people are secured in this loan facility.

Generally, two types of overdrafts are offered.

Secured overdraft

A secured overdraft is the kind of overdraft that is being offered where the facility is being extended against self-liquidating securities.

Clean overdraft

A loan facility where the overdraft facility is extended in a current account without any tangible security.

How is cash credit different from overdraft facilities?

The key differences between both credit loan facilities are as follows.

Basis of Differentiation	Cash Credit	Overdraft
Who is Eligible to take credit?	Manufacturers, traders, dealers, individuals, retailers, partnership firms, LLP, and Proprietors are eligible.	Account holders in the respective bank are eligible for the overdraft facility offered.
Objective	To meet working capital needs like buying raw materials, maintaining stocks, and Paying out unpaid expenses.	To keep the ongoing business operative, meeting short-term obligations of individuals and businesses
Rate of Interest	Charged based on the entire amount used and comparatively lower than an overdraft.	Charged based on the amount used and generally higher than cash credit.
Need for Bank account	A separate bank account is open to avail of cash credit schemes.	An existing current account is used for overdraft facilities.
Tenure of loan	Duration is generally one year	Loan duration varies; it can be monthly, quarterly, half-yearly or yearly.
Limit of loan amount	The amount is sanctioned based on the volume of stocks and inventories, which can go up to 60 per cent.	The amount is decided by the lender based on the account and your relationship with the financial institution. Security deposits and financial statements play a significant role in it.
Charges	Nil	Depending on the lender.

Authentication and documentation are required for cash credit.

Amenities offered in cash credit facilities vary from lender to lender. Moreover, there are some standard eligibility and documentation that are needed.

Minimum age of 25 years or above.
The income tax return for the last financial year will be submitted along with the loan application.
General three years of experience in business for which you are seeking a loan ( depending on the lender you approach).
Need to submit collateral to avail cash credit facility, lenders accept real estate as the collateral, and some may accept companies assets as well.

Documents needed for a cash credit facility.

Bank statement of 6 months
CA-certified financial documents
Collateral proof
Record of loan repayment
Income tax return of the year
Other miscellaneous documents, as per the lender's request

Requirement and documentation needed in overdraft facility.

A few requirements need to get fulfilled to avail overdraft facility personal loan are

Age of 25 years or above
Minimum income of INR 35,000 per month
Must be in the same job for at least six months
Minimum two years of prior job experience

Documents needed for the overdraft facility are

Three months salary slip copy
Income proof- Bank statement for three months
Identity proof
Residence proof

Similarities between Cash credit and Overdraft facility.

There are some similarities as well that confuses people between both credit facilities. As previously stated that both are defined as credit solution facilities and hence are the same in some aspects that are listed below.

Cash credit limits and overdrafts are repaid on demand by lenders.
Both financial credit tools are being offered against the security of current assets.
Interest charged on both cash credit and overdraft is charged on the amount used by the drawee and not on the entire loan amount.
The limit of the loan or sanctioned amount remains unchanged and additional amounts cannot be withdrawn in any case.

Conclusion

To grow, operate and function smoothly, every company and individual requires finance and monetary needs to manage the smooth functioning of the businesses and companies. Banks and financial institutions that are money providers to the nation avail two of the significant credit facilities, namely cash credit loan and overdraft facility, which is similar as well as different in various terms. The difference is derived based on eligibility, duration, nature of work, amount offered, rate of interest and limit in the loan offered. Documentation and authentication are a must in both credit facilities that differ. Cash credit and overdraft facilities are much-sorted financial products quickly availed with minimum paperwork. Both facilities are considered the easiest ways to expand businesses for entrepreneurs and company holders. At last, availing credit facilities to business owners and individuals are crucial for fulfilling business and personal expenses; however, the need for finances are essential when you are an entrepreneur or are in immediate need for money.

FAQs on Cash credit and overdraft facility

How is cash credit different from and debit?

In straightforward terms, credit money is the amount that goes out of the account; generally, when you pay someone, an amount is credited into that person's account. While debit money is the amount that goes into the account.

How to calculate the cash credit limit?

The cash credit limit is generally calculated by the bank as a percentage of the sale and stock exchange, along with financial statements. For example, a bank credit limit is up to 60% of stock plus 10% of sales or turnover of the business.

What is the cash credit limit in India?

The cash credit limit available in India ranges from Rs 20 lakhs to Rs 100 crore.

How is interest charged on the Cash credit limit?

Interest on the cash credit facility is calculated on the amount withdrawn ( daily closing balance of the account ) and not on the entire borrowing limit allowed to the borrower.