As a business owner, you’re aware that the number one factor responsible for the smooth functioning of a business is capital. And while there are many ways to procure business capital, two of the most popular of them are cash credit and overdraft facilities. But most people mistake one for the other or think they’re the same.
So, this guide will help you understand the difference between cash credit and overdraft so that you can make an informed choice for your business needs.
Cash credit vs. Overdraft: What is each?
Before getting down to the difference between cash credit and overdraft, let’s understand the basics of both. Both cash credit and the overdraft facility are considered to be business credit facilities that lenders offer to borrowers for which the lender uses hypothecation of the company’s inventories.
Hypothecation refers to giving company assets as collateral to secure a loan. Hypothecation is similar to collateral. The difference is that the borrower is the company instead of a person. Cash credit which is also known as a working capital loan, is a source of short-term finance for a company which helps in meeting instant cash requirements such as purchasing raw materials or day-to-day expenses.
An overdraft facility, on the other hand, is a financial instrument provided by lenders, using which you can withdraw money from your savings or current account even while you do not have sufficient balance. A fixed business loan interest rate will be levied to avail of the overdraft limit. This makes an overdraft facility a long-term financial solution.
Difference between cash credit and overdraft
As a business owner, your company’s financial needs are the top priority. Choosing the right credit facility is imperative in managing the affairs of your company optimally. And knowing the difference between OD and CCcan be all that it takes to turn the odds in your favour.
So, let’s go through the differences between the two in greater detail.
| Point of Distinction | Cash Credit | Overdraft Facility |
| Purpose | It is the part of business finance that allows you to meet short-term cash requirements, such as working capital, purchasing of raw materials, etc. | This is a long-term business loan that is better suited for needs such as expanding your company or keeping it afloat. |
| Rate of Interest Calculation | Interest is calculated on the entire amount you withdraw | Interest is calculated only on the amount that is used |
| Opening of Bank Account | You need to open a separate bank account | You may use your existing bank account |
| Maximum amount | You can withdraw up to 60% of the value of your receipts and inventory | The lender will decide the withdrawal limit |
| Withdrawal Limit Charges | Changeable based on the quantity and value of the inventory | Unchangeable |
| Availablility | This is available to businesses only | This is available to both businesses as well as individuals |
Which option is suitable for your business needs?
It all depends on why you need the capital and what your business goals are. In case your credit score is low, and you wish to improve or want to repay loans on time to ensure your business stays in the game in the long run, then opt for the overdraft facility with your lender.
But, if your funding needs are only short-term, like arranging for working capital, then the cash credit is a better option.
In summation
Knowing the difference between OD and CC is very important when deciding which credit facility to choose for your business. Both offer their own unique features, but the needs and financial aspirations of your business are what you need to consider in order to decide.
So, have you chosen which way to go? For easy-to-access and hassle-free business finance solutions, get in touch with Tata Capital’s lending experts. With interest rates starting at just 19%, you can avail of a loan principal of up to Rs. 75 lakhs. Also, our business loan eligibility criteria are relaxed, and we offer flexible EMI options for smooth and easy repayment. Use our online business loan EMI calculator and know your monthly EMIs of Business Loan in advance.
