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, the two of the most popular of them are cash credit or overdraft facilities. But most people mistake one for the other. So, this guide will help you understand the difference between the two so that you can make an informed choice for your business needs.

Cash credit vs. overdraft: What is each?

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. But cash credit, also known as working capital loans, is a source of short-term finance for a company which helps in meeting instant cash requirements.

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 the overdraft limit. This makes overdraft facility a long-term financial solution.

Additional Read: Business loan or Overdraft: Which is Better?

Difference between cash credit and overdraft

Let’s go through the differences between the two in greater detail –

Point of DistinctionCash CreditOverdraft Facility
PurposePart of business finance that allows you to meet short-term cash requirements, such as working capital, purchase of raw materials, etc.This is a long-term business loan that enables you to expand your company and keep it afloat.
Rate of Interest CalculationInterest is calculated on the entire amount you withdrawInterest is calculated only on the amount that is used
Opening of Bank AccountYou need to open a separate bank accountYou may use your existing bank account
Maximum AmountYou can withdraw up to 60% of the value of your receipts and inventoryThe lender will decide the withdrawal limit
Withdrawal Limit ChangesChangeable based on the quantity and value of the inventoryUnchangeable

Which option is suitable for your business needs?

If 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.

Additional Read: Difference between Personal Loan and Personal Loan Overdraft

In summation

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 flexi EMI options for smooth and easy repayment. Use our online business loan EMI calculator and know your monthly EMIs in advance.

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