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Do You Know The Difference Between Cash Credit And Bank Overdraft?

2021-06-04T11:32:39.852Z

To execute their everyday operations properly, all small and medium businesses require sufficient operating capital. When it comes to taking out a loan, businesses have two options: First is the long-term loans (small company loans, lines of credit, etc.), and second is the short-term flexible loans (like cash credit and overdraft)

Many businesspeople mistakenly believe that cash credit (CC) and overdraft (OD) are the same things. While these two short-term loan options look to be identical, they are two entirely different financial solutions that cater to different needs. Let’s take a closer look at the distinctions between CC and OD in this blog post, so you can figure out which is best for your business.

What is cash credit?

Cash credit is a sort of short-term loan offered to businesses to help them manage their working capital needs. The money is credited to a different account that is neither current nor savings.

Key points:

You are only allowed to utilize the funds for business purposes.
To receive the money from the cash credit, you’ll need to open a new bank account.
The number of transactions and checkbooks issued for the cash credit account is unlimited.
Borrowers must present the profit and loss statement, balance sheet, GST filing, and other documentation once per quarter and annually.
To obtain cash credit loans, most lenders demand the borrower to provide collateral.
The loan can be repaid every day or weekly, depending on the lender’s terms and conditions.

What is an overdraft?

Overdraft is a facility given by banks to a limited number of consumers. It permits current account customers to withdraw more money than is available from their bank account. You can use this method to issue checks even if your account balance is insufficient.

Key points:

Only reputable customers are eligible for an overdraft. Customers that have a good relationship with the bank and are in excellent financial standing are eligible for this service.
This facility is charged by the bank. The amount of fees charged is determined by the additional amount you withdraw from your account and varies by bank.

Similarities between Cash Credit and Overdraft

The lender’s Cash Credit and Overdraft interest rate are based on the amount of money used, not on the sanctioned amount or limit.
The cash credit limit and the amount of the overdraft are repayable on demand.
Both of these financial tools are offered as collateral for existing assets.
In both circumstances, the loan limit and amount sanctioned remain set, and extra funds cannot be withdrawn.
Amounts in excess of the sanctioned or available cash limit can be withdrawn.

Difference between Cash Credit and Overdraft

Cash Credit

When compared to an overdraft, the interest rate is cheaper.
On the hypothecation of stocks and goods, a cash credit loan can be obtained.
Cash Credit does not deteriorate over time.
A new account must be opened in order to receive Cash Credit.
Cash Credit should only be used for business reasons, and the loan amount is determined by the stock and inventory volume.
Cash credit loans are available for a minimum of one year.
Individuals, retailers, traders, manufacturers, distributors, businesses, partnerships, sole proprietorships, LLPs, and other entities can apply for cash credit loans.
Cash credit is granted based on the company’s success and the state of the market.

Overdraft

The interest rate is higher in comparison.
An overdraft can be obtained based on credit history, bank relationships, and investments such as FDs, insurance policies, and so on.
Overdrafts can be utilized for a variety of purposes, including corporate needs.
The amount of the loan is determined by financial statements and security deposits.
In the event of an overdraft, there is a monthly reduction.
On the applicant’s existing account, an overdraft facility is available (account holder)
Overdrafts are available for a month or quarter at a time, with a maximum of one year.
Only account holders of the relevant bank are eligible for an overdraft.
The approval of an overdraft is based on financial data and credit history.

Endnote

Hopefully, the blog gives you the valuable insights needed to choose between cash credit and bank overdraft.

What Everyone Must Know About Cash Credit

2021-03-08T07:04:52.803Z

Consistent cash inflows help businesses take care of their day-to-day operations. If a company’s working capital needs aren’t met adequately, it could negatively affect its smooth business operations. To bridge this financing gap, cash credit or working capital loan is introduced by the banks. This loan can be availed either in the form of a secured loan or an unsecured loan. A company typically has a running account with a particular lender for a cash credit loan and uses funds from the account whenever the need for working capital arises. Now, let us understand what cash credit is? And how it works?

What is Cash Credit?

Cash credit is a short-term financing or loan for a company to fulfill its working capital requirements. The loan can be used for different purposes, including paying the storage area rent, buying raw materials, paying staff wages, etc., and has a tenure of up to 12 months. A company needs to submit collateral or security to avail cash credit loans. The collateral to be submitted can be in the form of raw materials, stock-in-trade, fixed assets, equipment, finished goods, etc. In addition, cash credit allows a company to withdraw money as many times but up to its withdrawal limit.

An attractive feature of a cash credit loan is that the interest rate is charged only on the amount withdrawn, not on the whole borrowed limit. For example, Company A is a chip manufacturer that owns and operates a factory where it spends money to buy raw materials to convert them into finished products. The finished product inventory is not sold right away. In this case, the company's fund is stuck in the form of inventory. Company A takes a cash credit loan to cover its expenses while waiting for its finished goods inventory to turn into cash.

Spotlight Features of Working Capital loan:

· Cash credit is granted against collateral or security.

· It is given to meet the daily working requirements of a business.

· It can be repaid in the form of monthly, quarterly, or half-yearly repayments.

· Individual applicants can avail cash credit against their fixed deposits and save on interest.

· Interest rate pay off on cash credit loan is tax-deductible

· Money can be withdrawn any number of times from the sanctioned limit.

How does a Cash Credit works?

Cash credit lets a company withdraw money from a bank account that is created by the bank (lender). The company can withdraw a number of times until the total sanctioned limit is reached. The lender determines the cash limit based on the applicant’s profile and creditworthiness. Also, the amount approved is calculated based on the business’ need for cash, current assets and liabilities, creditworthiness, repayment capacity, etc. The amount withdrawn is subject to an interest rate that is evaluated on the given collateral, creditworthiness, and other factors. Moreover, the bank has the right to recall the funds at any moment, and the borrower is expected to repay them immediately. Even if a company does not use any borrowed funds, it must pay a minimum commitment fee to the bank.

Who can avail for Cash Credit?

This loan facility can be availed by business owners, individuals, sole proprietorships, companies, limited liability partnerships (LLPs), partnerships, co-operative societies, and registered trusts engaged in manufacturing, trading and services categorized under MSME.

Advantages:

· A quicker way of dealing with working capital shortages

· The cash credit loan is easily arranged by the bank as long as the loan amount is determined and collateral security is pledged.

· The company gets flexibility in withdrawing credit as many times from the account up to its withdrawal limit.

· The deposit can be made whenever the company has excess funds to lessen the burden of interest.

· Easy arrangement, provided that collateral is available to be pledged.

The expression ‘cash is king’ signifies the importance of cash. Without the proper amount of cash on hand, businesses can run into major trouble and even be forced into bankruptcy. If a company does not have enough funds to meet its working capital needs, it can go for cash credit. If you are facing any financial issues, connect with our experts to find the right solution.