Introduction
Running a business is not always smooth. Sometimes you need fast money to keep the business operational. That's why knowing the difference between cash credit vs overdraft matters. These two credit options sound alike but work in different ways. This blog helps you understand which option fits your money needs and keeps your business moving.
What is Cash Credit?
From the cash credit definition, it is a loan that helps businesses handle daily costs like buying goods or paying bills. You can borrow money up to a set limit, even if your account is empty. You only pay interest on the amount you use, not the whole limit.
To get cash credit, you usually need to give something like stock or property as security. The bank checks this and then sets your limit. The loan is often given for one year and can be renewed. Cash credit vs overdraft is a common choice for business owners. Picking the right one depends on how often you need funds and how your cash flows.
Features of Cash Credit
1. Cash credit is a short-term loan that must be repaid within twelve months.
2. The borrowing limit depends on your business strength and cannot go beyond that.
3. Interest is only charged on the amount you use, not the full limit.
4. You must give security, such as stock or property, to get this instant personal loan.
How does Cash Credit work?
Cash credit is mainly for businesses that need money for regular costs like stock or bills. To get it, you must offer something valuable, such as stock, property, or business goods. This is called collateral. The bank checks this and decides how much you can borrow. Once you have it, you can take out money whenever needed up to the set limit.
You don't need to take the full amount. You pay interest only on the money you use. That saves money if you don't need the whole loan. The bank reviews your use often. You may need to share stock details and bank data. If things look good, the cash credit can be renewed every year.
Some people call it a cash reserve account. It helps with short-term costs and avoids paying high charges like those in other instant cash loans. Knowing how this works helps you decide if cash credit vs overdraft is better for your business. Use this to keep your cash flow running smoothly.
What is Overdraft?
An overdraft lets you spend more money than what's in your account. It is linked to your bank account and comes with a limit. You can use it for short-term needs like bills or emergencies. This works like a safety line when your money runs low. You pay interest only on the amount used, not the full limit.
Many overdrafts do not need security, but they cost more because of higher rates. Choosing between cash credit vs overdraft depends on how often you need funds and if you have security to offer.
Features of Overdraft
1. You can spend more than your account balance during urgent cash needs.
2. Some banks offer extra cover to avoid fees when your balance hits zero.
3. You get fast access to credit without filling in any forms.
4. Banks may charge fees if your account stays in the negative for too long.
How does overdraft work?
An overdraft lets you take out more money than what is in your bank account. It's linked to your current account. The bank sets a limit, and you can use money up to that amount when needed.
Say your account has ₹1,000 and you need to pay ₹1,500. With overdraft, the bank lets you use the extra ₹500. Your account balance becomes -₹500. You pay interest only on that ₹500 and only for the days you use it.
Some overdrafts link to another account. If your balance hits zero, the bank takes money from the linked account. This helps avoid charges and payment failures.
Some banks also offer overdraft as a loan tied to your account. Cash credit vs overdraft depends on how often you need money and whether you have items to keep as security. Overdraft helps when your need is sudden, short, and urgent.
Types of Overdraft
Overdrafts can work in more than one way. Banks offer different types based on how much money you need and what kind of account you hold. These types give you flexibility to manage short-term gaps in money. Let's look at the most common types of overdrafts you may come across.
1. Standard Overdraft
A standard overdraft lets you use more money than your account balance. You can spend beyond zero if your bank allows it. For example, if you have ₹500 and pay ₹600, the bank covers the ₹100 extra. It charges a fee and interest on that ₹100. This type suits low-risk borrowing & is common with many personal and business current accounts.
2. Secured Overdraft
A secured overdraft is backed by something you own, like stocks or mutual funds. The bank holds this as a safety. You can get a higher limit than an unsecured one. The bank can claim your collateral if you miss payments. This option works if you have investments and want a safer way to borrow money.
3. Clean Overdraft
A clean overdraft does not need any security. The bank lets you overdraw based on your past record and account size. This is usually given to people or businesses with a strong account history. It is not easy to get unless you have a good name with your bank.
Also Read: Overdraft Facility
Difference Between Cash Credit and Overdraft
Want to learn the difference between cash credit and overdraft? Let's find out the difference between overdraft vs cash credit:
Basis | Cash Credit | Overdraft |
Purpose | Used for business working capital needs | Used for short-term personal |
Security | Needs stocks or inventory as security | May not need security; depends on credit score and banking history |
Interest Rate | Lower cash credit interest rate due to collateral provided | Higher interest rate |
Applicants | Traders, companies, LLPs, etc. | Only for account holders of the bank |
Loan Amount | Based on the value of pledged stock or inventory | Based on financial history and deposit security |
Tenure | One year, and can be renewed | One month to one year, depending on bank rules |
Limit | Fixed limit that stays the same | The limit usually lowers month by month |
Account Type | Needs a new loan account | Linked to your current bank account |
Usage | Only for business costs and regular expenses | Can be used for general purposes or businesses |
Similarities between Cash Credit and Overdraft
Considering cash credit vs bank overdraft, both cash credit and overdraft give quick access to funds when you need support. They may serve different goals, but some core features make them work in similar ways.
1. Interest is charged only on the amount used, not on the total loan limit.
2. Banks may need collateral or account history before approving either type of loan.
3. Both options must be repaid when the bank demands full payment from you.
4. Loan limits stay fixed once approved, and you can't borrow more than allowed.
When to Choose Cash Credit and Overdraft?
Picking between bank overdraft vs cash credit depends on how your business works and what money issues you face.
Choose Cash Credit if:
1. Your business needs regular working capital for stock or monthly operating costs.
2. You can offer assets like inventory or receivables as security to the bank.
Choose Overdraft if:
1. You need short-term funds for sudden bills or seasonal sales drops.
2. You don't have strong collateral but have a good bank history.
Use what fits your money needs best. Think about how often you borrow and how you repay.
Things to keep in mind while choosing Cash Credit or Overdraft
Choosing between cash credit vs overdraft facility means looking beyond just interest rates. Costs and rules can affect your loan experience.
1. Always check processing fees because they differ across lenders and directly affect how much you end up paying for the loan.
2. If you plan to repay early, check if foreclosure charges apply. Some lenders take 1% to 2% of the remaining amount.
3. Some banks charge fees on the cash credit depending on the pledged value of stocks, so borrow only what you truly expect to use.
Conclusion
Picking between the difference between overdraft and cash creditdepends on how your business runs and what kind of cash help you need. If you need steady support for regular spending, cash credit may work better. An overdraft may suit you more if you face short-term gaps now and then.
Make sure to check all costs, terms, and rules before you apply. Think about how often you'll use the money and how fast you can repay. The right choice helps your business stay strong without extra pressure.
Frequently Asked Questions (FAQs)
Q.1. Which one has a lower interest rate – cash credit or overdraft?
Considering the cash credit interest rate of all banks, cash credit usually comes with lower interest rates because it's secured with business assets like stock or property. Overdrafts are mostly unsecured, so they carry higher interest. If you have valuable assets and regular working capital needs, cash credit may cost you less overall. Always compare rates, as they can change depending on your credit score and lender policy.
Q.2. Is overdraft protection the same as taking credit?
Overdraft protection is a type of short-term credit. It helps you complete payments when your account has no balance. It is not like a loan with fixed terms. The bank may link it to another account or give a credit limit. You repay it when money is available. It's flexible but still counts as borrowing with interest or charges added.
Q.3. Can start-ups get cash credit or overdraft facilities?
Start-ups can get these, but banks check your credit score, business plan, and financials. For cash credit, you may need to offer security like inventory. For overdrafts, a good bank record and income flow help. Some lenders may say no if your business is too new. It's easier if you already have a stable account with them.
Q.4. Do I pay interest on the full limit in cash credit or overdraft?
No, interest is charged only on the amount you use, not the full approved limit. So, if you use ₹30,000 from a ₹1,00,000 limit, interest applies to ₹30,000. This applies to both cash credit and overdraft. That's why they're helpful for short-term needs. You control what you pay based on how much you actually borrow.
Q.5. Can I change my overdraft facility into a cash credit account?
Banks don't usually switch from overdraft to cash credit directly. These are separate credit types with different rules. You may apply for a new cash credit account if you meet all the terms. You'll need to provide security and meet their checks. It depends on your business needs and what the bank offers. Always ask your bank what's allowed.
