28 November, 2023
In today’s day and age, you can rely on various forms of financial assistance to meet your capital requirements. With so many options available, it can become challenging to understand the differences and pick one that suits your business needs and financial capabilities. Since borrowers are often confused between cash credit and overdraft, this article aims to clarify things. Continue reading to understand the difference between cash credit and overdraft and which one would suit your business better.
What are cash credit and overdraft?
Cash Credit is a short-term loan offered to companies, businesses, and financial institutions for their working capital requirements. On the other hand, an Overdraft Facility refers to the credit funding offered by banks to individuals and companies. It enables them to withdraw money from banks where they have accounts, even if their account balance is not enough, zero, or negative.
Both cash credit and overdraft have certain similarities between them. For instance, the interest rate is charged on the money utilised, not the amount sanctioned for both. Plus, to avail either, you must provide security of current assets. The loan amount offered remains fixed, and additional money is not provided in either case. Now that you know more about the two let’s look at the difference between cash credit and overdraft.
Also read: Here's what you must know about Cash Credit
Overdraft vs cash credit: what is the difference?
Cash credit and overdraft differ from each other in the following aspects:
Interest rates: While you can avail of funds at a lower interest rate with cash credit, the rates are higher with an Overdraft facility.
Security: To avail of cash credit, you must hypothecate your stocks and inventory. In contrast, overdrafts can be availed based on your financials, credit history, investments, relationship with the bank, etc.
Purposes: Cash credit is usually available for business purposes, especially as working capital. Overdrafts can be availed for any general purposes, including business-related expenses.
Loan amount: With cash credit, the loan amount sanctioned is based on the volume of stocks and inventory. On the other hand, the loan amount sanctioned under overdraft is based on financials and security deposits.
Limit: While the limit does not reduce with cash credit, it reduces every month with an overdraft.
Account: To avail of cash credit, you must open a new bank account, whereas you can access overdraft via an already existing account.
Tenure: You can avail of cash credit for a minimum of 1 year, whereas the tenure of overdraft ranges from a month, a quarter to a maximum of 1 year.
Applicants: Cash credit can be availed by individuals, traders, manufacturers, retailers, distributors, partnerships, companies, sole proprietorships, LLPs, etc. On the other hand, overdrafts can be applied for by account holders of the respective banks.
You can read more about cash credit here.
Now that you know the difference between cash credit and overdraft, you must also keep certain other points in mind. Take a look at the processing fees charged by the lender for both. Similarly, take a look at the interest rates and the limit placed on loan amount utilisation. Certain banks do charge extra on the unutilised loan amount after a specific time period. Lastly, also make sure to find out if your bank levies any foreclosure charges if you want to close the amount.
Looking at the difference between cash credit and overdraft, it will become easier for you to decide which option suits your business requirements better.
HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.
To learn more about the various products and services at HDFC Bank that can benefit your enterprise, you can check out the MyBusiness page here.
Also read: What is an overdraft and how it can help your business
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. HDFC Bank recognises the challenges entrepreneurs face while acquiring capital. Thus, HDFC Bank has created MyBusiness, a one-stop solution that gives you easy access to loans, digital solutions and provides you with the essential knowledge you need to run your business. With HDFC Bank MyBusiness, you can scale up, expand your operations, and nurture your business.