Difference Between Cash Credit and Overdraft
Last Updated : Feb. 6, 2023, 3:35 p.m.
As everyone thinks cash credit and overdraft are the same but there is a big difference between both. In this blog, you can clearly find the difference between both. Below the table, you can clearly understand the meaning, purposes, interest rate calculation, account type, interest rate, the maximum limit, withdrawals limit and charges.
| Particulars | Cash Credit | Overdraft |
|---|---|---|
| Meaning | Cash credit is a short-term type of loan provided by a financial institution to meet the base requirement of working capital. | Overdraft is a facility that allows you to withdraw more than the balance in your account. |
| Purposes | - Purchase of raw material - Receivables - Stock maintenance - Keeping Inventory | - Business Purposes - Non - Business Purposes - Individual Use |
| Interest rates Calculation | The interest rate is calculated on the actual amount withdrawn. | The interest rate is calculated on the used amount only. |
| Interest Rate | Lower Rates | Higher Rates |
| Account Type | You have to open separate account for taking cash credit | Overdraft facilities do not require you to open a new account. This facility is available on the basis of your current account. |
| Maximum Limit | You can get 50-60% of the total value of your inventory and receipts | Financial institutions decide the limit on the basis of a current account balance and relationship. |
| Withdrawal Limits | The change in withdrawal limits can be changed on an immediate basis, If your receivables and inventories increase and decrease. | The withdrawal limit cannot be immediately changed. This can be changed on average maintaining the balance in your current account. |
| Charges | NIL | Varies on the financial institution |
Cash Credit
Cash credit is a small type of loan and has a tenure of 1 year. This CC can be taken to meet working capital needs.
Key Points
- This money can be used only for business purposes.
- You have to open another account for the cash credit.
- You have no limit on doing transactions and cheque books are issued.
- Submit the following documents quarterly and yearly such as balance sheet, profit and loss account, GST.
- The borrower has to provide collateral and security to avail the cash credit loan.
- So you can repay the loan on a daily, weekly basis as per lender structured.
How to Calculate the Cash Credit?
Cash credit is calculated based on the percentage of sales and stock along with the financial statement. Understand with the help of an example –
Any financial institution allows you to take up to 80% cash credit and 20% stock for sales.
Overdraft
An overdraft is a facility provided by a financial institution, you can withdraw more money from the available balance in your account or even if you have insufficient balance.
Key Points
- This facility can be provided by the bank only to reputed customers. Such customers have a good relationship with the bank, the financial position of the customers.
- This facility is not free. You have to pay a fee on the withdrawal amount.
- The fees charged for the overdraft will depend on the bank.
Type of Overdraft
There are two types of overdraft facilities that can be availed.
Secured Overdraft
Get secured overdraft facility against fixed deposits, life insurance policy, mutual fund etc.
Unsecured Overdraft
Basically overdraft facilities can be based on your average balance on current account and relationship with the financial institution.
What is the way of Calculating Interest Rate on Overdraft
- With the help of this method, you can calculate the interest rate on the overdraft facility.
- Current Annual Percentage Rate (APR) / 365 days but in case of a leap year, you can calculate APR / 365 days.
Conclusion
Cash credit is a small type of loan whereas overdraft is the facility in which you can withdraw the amount even if you have zero balance in your account or insufficient. Cash credit charges lower interest rate but overdraft charges high-interest rate, facilities can be avail at a lower interest rate but in the overdraft, it offers a higher interest rate.