What is Overdraft (OD) and Cash Credit (CC) & Difference Between Them

What is Overdraft (OD) and Cash Credit (CC) & Difference Between Them

What is Overdraft (OD) and Cash Credit (CC) & Difference Between Them: Businesspersons and entrepreneurs have to maintain healthy cash flow and optimum working capital at all times in order to keep their enterprises operational.

However, this is easier said than done!

Optimising inventory or business expansion goals may never see fruition unless there are proper funds available. This is why many financial institutions offer flexible options in the form of Overdrafts (OD) and Cash Credits (CC) to their prospective customers. The main difference between overdraft and cash credit lies in how they are secured. Besides, there are several other factors for the difference between them.

Cash credit is a business loan given for the short term. It is meant for people in business wanting to get instant working capital. On the other hand, the overdraft facility is long-term financial assistance. It allows one to withdraw money from their account even with zero balance.

Both are commonly referred to as credit facilities banks or lenders offer borrowers.

So, if one is looking for flexible financing options for meeting fleeting business requirements or to initiate their much-awaited dream of expanding their operations, know all about overdraft and cash credit and the significant differences between them before choosing one.

What Are Overdraft Accounts?

Overdraft is the ideal and highly flexible financing option for individuals and business owners, especially during unforeseeable emergencies. If one holds an OD or checking account, one is subject to overdraft protection.

If one runs short of funds in their OD account for completing a transaction, the overdraft facility is going to cover that difference, and the balance will drop to the scale’s negative side. This process of providing emergency credit to the overdraft account holder when the balance falls below zero is known as overdraft protection.

What Is A Cash Credit (CC)?

As cash credit and overdraft are both on the lines of credit facilities offered by lenders, it is relatively easy to be confused. Cash credits (CC) are short-term financial solutions that a business house can avail by securing substantial company assets.

This could be raw materials from the inventory, stocks or even account statements. As opposed to the OD, cash credits are usually offered to business houses and not individuals.

Difference Between Cash Credit and Overdraft

Now that we have discussed the basic idea of cash credit and overdraft let’s talk about the critical differences between the two.

Features Cash Credit Overdraft
Purpose To help one buy raw materials, take care of receivables and maintain stocks. To keep one’s business operational.
Purpose Individual requirements To fulfill non-business requirements
Calculating rate of interest Based on the entire amount you withdraw Based on the amount used
The general interest rate Lower Higher
Bank account Need to open a separate account One can use their current account to avail the facility
Maximum amount Up to 60% of the value of one’s inventories and receipts The lender decides based on their account and their relationship with the institution
Limit of withdrawal It can be changed based on the value or quantity of one’s inventories It cannot be changed. Your current balance may influence one’s existing account.
Charges Nil One’s lender decides

Points to Remember when opting for Overdraft or Cash Credit

  • Processing Fee: Keep track or compare processing fees charged by the bank or financial institutions, as they might vary from bank to bank.
  • Interest Rate: The rate of interest charged by lenders for a Cash Credit loan is cheaper as compared to an Overdraft facility.
  • Loan Amount Utilisation: Cash credit offers a defined limit that depends on the hypothecation of stocks. There are several banks that charge an extra amount on the unutilised loan value after a particular time period.
  • Foreclosure charges: Several lenders do charge foreclosure charges in case the borrower is willing to close the amount. In this case, borrowers have to pay a specific percentage of the loan amount for closing their loan account, ranging from 1% to 2% in general.

Hence, it is always recommended to check all the hidden and additional fees and charges imposed by the financial institution before opening a new account or availing of the Overdraft facility on their existing account. Long-term funding is given at a low interest rate, and short-term financing acquires higher interest rates.

Similarities Between Cash Credit and Overdraft

  • The rate of interest given by the lender for Cash Credit and Overdraft is loaded on the amount of money utilised and not on the approved amount or limit
  • The Overdraft and Cash Credit limit amount is repayable on demand
  • Both these financial tools – Cash Credit and Overdraft – are offered against the security of current assets
  • The loan limit and amount of loan sanctioned remains fixed, and additional money can’t be withdrawn in both cases
  • Excess money can be withdrawn that approved or available cash limit

Cash Credit and Overdraft are considered the two most vital financial tools to meet an individual or company’s short-term and long-term requirements. Both these products look considerably similar still can be differentiated on various financial aspects. Cash Credit and Overdraft are recognised to be popular types of business loans wherein minimum documentation is needed.

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